Macroeconomics Chapter 5

If the real interest rate is 3% and the inflation rate is 7%, then the nominal interest rate equals: 7%. 4%. 3%. 10%

10%

Suppose a borrower and lender agree to an interest rate on a loan when inflation is expected to be 6%. The borrower would benefit the most if which of the following inflation rates actually occurred? 0% 6% 3% 9%

9%

Consider the values of the CPI (multiplied by 100) for each year from 1990 to 2000 in the table below. A report found that the real entry-level wage for college graduates declined by 8 percent between 1990 and 1997. The nominal entry-level wage in 1997 was $13.65 per hour. Year CPI 1990 130.7 1991 136.2 1992 140.3 1993 144.5 1994 148.2 1995 152.4 1996 156.9 1997 160.5 1998 163.0 1999 166.6 2000172.2 Instructions: Enter your responses rounded to two decimal places. a. The real entry-level wage in 1997 was $ . b. The real entry-level wage in 1990 was $ . c. The nominal entry-level wage in 1990 was $

A. 8.50 B. 9.24 C. 12.08

Government survey takers determine that typical family expenditures each month in the year designated as the base year are as follows: • 20 pizzas, $10 each • Apartment rent, $600 per month • Gasoline and car maintenance, $100 per month • Phone service (basic service plus 10 long-distance calls), $50 per month In the year following the base year, the survey takers determine that pizzas have risen to $11 each, apartment rent is $640, gasoline and maintenance costs are $100, and phone service has dropped in price to $40.

CPI: 1.053 inflation: 5.3%

Government survey takers determine that typical family expenditures each month in the year designated as the base year are as follows: • 25 pizzas, $10 each • Apartment rent, $600 per month • Gasoline and car maintenance, $100 per month • Phone service (basic service plus 10 long-distance calls), $50 per month In the year following the base year, the survey takers determine that pizzas have risen to $11 each, apartment rent is $640, gasoline and maintenance costs are $120, and phone service has dropped in price to $40.

CPI: 1.074 Inflation: 7.4%

Inflation reduces economic efficiency because it does each of the following except: Induce people to minimize cash holdings. Obscure information transmitted by prices. Change relative prices. Distort incentives through interaction with the tax laws.

Change relative prices

Assume one investor bought a 10-year inflation-protected bond with a fixed annual real rate of 1.5% and another investor bought a 10-year bond without inflation protection with a nominal annual return of 4.2%. If inflation over the 10-year period averaged 2 %, which investor earned a higher real return? The investor who purchased the inflation protected bond. Neither investor earned a positive real return. The investor who purchased the bond without inflation protection. Both investors earned the same real return.

The investor who purchased the bond without inflation protection.

The core rate of inflation excludes food and energy prices because: A). these prices are most frequently responsible for short-run fluctuations in the inflation rate. B). these prices do not matter to policymakers. C).these prices don't change very frequently. D).consumers do not directly face these prices.

These prices are most frequently responsible for short-run fluctuation in the inflation rate

The consumer price index measures the cost of: a changing basket of goods and services. goods and services required to live above the poverty level. a fixed basket of goods and services. all goods and services purchased by consumers.

a fixed basket of goods and services

For a given nominal interest rate, an unexpectedly high inflation rate ______ the real interest rate. A). decreases B). has no impact on C).increases D).may either increase or decrease

decreases

Unexpectedly high inflation ______ borrowers and ______ lenders. hurts; helps helps; hurts helps; helps hurts; hurts

helps;hurts

It is difficult to engage in long-term financial planning when inflation is: accounted for through indexing. high and erratic. predictable. low and stable

high and erratic

A nominal value is measured: using the consumer price index. by indexing. in terms of current dollar value. in physical terms.

in terms of current dollar value

If workers received a 5 percent wage increase and the rate of inflation was 3 percent, then their real wage: increased. decreased. equaled the nominal wage. remained constant.

increased

The price of a gallon of gasoline at the pump increased by 10 percent at the same time that the inflation rate was 15 percent. The nominal price of gasoline _____, and the real price of gasoline _____. decreased; increased increased; also increased increased; decreased increased; did not change

increased; decreased

The price of a gallon of gasoline at the pump increased by 5 percent at the same time that the inflation rate was also 5 percent. The nominal price of gasoline _____, and the real price of gasoline _____. did not change; increased increased; decreased increased; did not change did not change; did not change

increased; did not change

If you wish to maintain a constant purchasing power when you retire, you should choose retirement income options that are: deflated. nominal. inflated. indexed.

indexed

To prevent people paying a higher percentage of their income in taxes even when their real incomes have not changed, Congress: reduced the capital gains tax. deflated the income tax brackets to the CPI. indexed the income tax brackets to the CPI. implemented a flat tax.

indexed the income tax brackets to the CPI.

Two methods used to adjust nominal values for inflation are: indexing and deflating. aggregating and disaggregating. real and nominal. substituting and complementing.

indexing and deflating

The annual percentage rate of change in the price level is the: cost of living. inflation rate. relative price. Fisher effect.

inflation rate

Over time, the core rate of inflation should be ______ than the general rate of inflation. less meaningful less stable more stable higher

more stable

The real interest rate equals the: nominal interest rate plus the inflation rate. inflation rate minus the nominal interest rate. nominal interest rate minus the inflation rate. inflation rate times the nominal interest rate.

nominal interest rate minus the inflation rate

The nominal return on an inflation-protected bond equals a fixed real return: plus the expected rate of inflation. divided by the price level. plus the actual rate of inflation. minus the actual rate of inflation.

plus the actual rate of inflation.

Deflation is a situation in which the: quantity of goods and services produced is decreasing over time. prices of most goods and services are falling over time. prices of most goods and services are rising over time. quantity of goods and services produced is increasing over time.

prices of most goods and services are falling over time.

Inflation is a measure of the ______ of prices; the CPI is a measure of the ______ of prices. current level; rate of change in the level index; base year's level base year's level; index rate of change in the level; current level

rate of change in the level; current level

The wage paid to workers measured in terms of real purchasing power is called the: nominal wage. cost of living. real wage. minimum wage.

real wage

Making more frequent, but smaller cash withdrawals from banks ______ the inflation losses from holding cash and ______ the shoe leather costs of inflation. reduces; has no impact on increases; increases increases; reduces reduces; increases

reduces; increases

Which of the following is a nominal quantity? The amount of coal mined in one month The number of people unemployed The number of cars produced in 2005 The current price of a barrel of oil

the current price of a barrel of oil