Macro 4.2/

Which of the following statements about inflation is true? A The expected inflation rate is the difference between nominal and real interest rates. B Low expected inflation rates lead to high inflation rates. C Lenders lose from expected inflation. D Lenders gain from unexpected inflation. E Workers lose from expected inflation.

A The expected inflation rate is the difference between nominal and real interest rates.

Assume that the inflation rate is 1010 percent and a bank account effectively yields a real rate of interest of negative 55 percent per year. Would a person be better off keeping money in the bank account or in cash? A Cash, because it returns 55 percent more per year than the bank does. B Cash, because it avoids losing 55 percent per year. C The bank account, because it returns 1515 percent more per year than holding cash does. D The bank account, because the loss is less than it is when holding cash. E The bank account, because while the real interest rate is negative, the real return is positive.

Answer D Correct. Holding cash, a person would lose 10%, the rate of inflation. However, keeping the money in the bank account, a person would lose only 5%. Thus, a person would be better off keeping the money in the bank account.

Which of the following is true about inflation and interest rates? A The higher the inflation rate, the higher the real interest rate. B If there is no actual or expected inflation, the nominal and real interest rates are equal. C If the economy is experiencing deflation, the nominal interest rate exceeds the real interest rate. D The higher the inflation rate, the lower the nominal interest rate. E The nominal interest rate is the difference between the real interest rate and the expected inflation rate.

B, If there is no actual or expected inflation, the nominal and real interest rates are equal.

The real interest rate earned is the A same as the nominal interest rate when inflation is moderate B cost of borrowing in current consumer prices C cost of borrowing in current producer prices D cost of borrowing adjusted for the rate of change in the price level E nominal interest rate adjusted for the growth rate of the economy

B, cost of borrowing adjusted for the rate of change in the price level

When Stephanie took out a one-year fixed-rate loan, she expected to pay a real interest rate of 3 percent. At the end of the year, the real interest rate had fallen to 2 percent. Which of the following could have caused the decrease in the real interest rate? A There was an increase in the nominal interest rate. B There was a decrease in the nominal interest rate. C There was a decrease in the money supply. D The actual inflation rate was greater than the expected inflation rate. E The actual inflation rate was less than the expected inflation rate.

D, The actual inflation rate was greater than the expected inflation rate. B/c if it was greater that means more is being subtracted then originally presumed bc real interest rate=nom-expected

If both the nominal interest rate and the expected inflation rate increase, what will happen to the real interest rate? A It will increase because the expected inflation rate has increased. B It will increase because the nominal interest rate has increased. C It will increase if the expected inflation rate increases by more than the nominal interest rate. D It will decrease because the nominal interest rate has increased. E It will decrease if the expected inflation rate increases by more than the nominal interest rate.

E It will decrease if the expected inflation rate increases by more than the nominal interest rate.

Which of the following is true about the expected real interest rate? A It is equal to the nominal interest rate plus the expected inflation rate. B It is equal to the ratio of the nominal interest rate to the inflation rate. C It increases as the price level increases. D It is always positive. E It is negative if the expected inflation rate exceeds the nominal interest rate.

E, It is negative if the expected inflation rate exceeds the nominal interest rate.

When purchasing her house, Ms. Jones took out a 15-year mortgage loan from a local bank at a fixed interest rate of 7 percent. The rate of expected inflation at the time was 3 percent. If the actual rate of inflation was 4.5 percent, which of the following is true?

The bank lost because the real rate of interest decreased by 1.5%.

Last year both a borrower and a lender expected an inflation rate of 3 percent when they signed a long-term loan agreement with fixed nominal interest rates of 5 percent. If the actual inflation rate were lower than expected, who would benefit?

The lender would benefit.

In the long run, a fully anticipated increase in the inflation rate will

increase the nominal interest rate