Mod 14 & 15 review

Menu costs of inflation are the

costs associated with businesses changing prices

Unit-of-account costs of inflation are the

costs associated with money being a less reliable unit of measure

A process that brings the inflation rate down, is called:

disinflation

Which of the following represents the best scenario for a bank lending its money to a customer?

fixed interest rate of 8% with 1% inflation

Unanticipated inflation

helps borrowers and hurts lenders

An increase in the price level that is extreamly rapid (say 400% per year) is called

hyperinflation

Suppose that a bank wishes to make 5% rate of return on a one-year loan but expects that inflation over the course of the loan will be roughly 3%. Which of the following is true?

if the bank charges 8% and the inflation rate is less than 3%, then the bank will have earned a larger rate of return thsn expected

Over the last year, Eli has been working very hard and his employer has taken notice by giving him a 6% raise in his salary. During this last year, overall prices in the economy have increased by 4%. given this information, Eli's real wage has

increased by 2%

shoe leather costs refer to the

increased cost of transactions due to inflation

increases in the average level of prices is called

inflation

If the consumer price index changes from 120 to 125 between December 2007 and december 2008, the:

inflation rate for 2008 is 4.2%

inflation doesn't reduce purchasing power if

it causes an increase in nominal wages equivalent to the rate of inflation

you have gone to the bank to borrow money for one year. The nominal rate is 7.5%. the real rate of intrest is 4%. Over the course of the year, overall prices increased by 4%. This rate of inflation hurt the ___ because the actual rate of inflation was ___ than the anticipated rate of inflation.

lender; higher

The purpose of indexing Social Security payments to the CPI is to

maintain the purchasing power of retirees

Unit-of-account costs refer to the problem associated with high inflation rates that:

makes money

The threat of future inflation

makes people reluctant to loan money for long periods

When hyperinflation fprces Pedro to change the price stickers on the books in his bookstore very frequently to keep up with the aggregate price level, economists say that Pedro is experiencing a

menu cost

During rapid price inflation, firms must frequently change prices. The cost if changing prices is known as the

menu costs

Menu costs refer to the increased cost

of food in a time of inflation

which of the following is a likely response to inflation

people tend to make more transactions

alex expects the inflation rate to be 4%. if Alex borrows money at a nominal interest rate of 5%, his real interest rate is

positive and less than the nominal interest rate

which of the following statistics is used to measure changes in the prices that firms pay for goods and services

producer price index

If money income remains the same, while the average price level doubles

real income will fall

Unanticipated inflation

reduces the value of money

unanticipated inflation

reduces the value of the debt owed by borrowers

Menu costs are

the real cost of changing listed prices

the nominal interest rate equals

the real interest plus the expected rate of inflation

Which of the following is true concerning interest rates

the real interest rate can be zero, positive, or negative

Currently, banks are issuing personal loans at an interest rate of 9%. If expected inflation is supposed to be 3%, then

the real interest rate is 6% and the nominal intrest rate is 9%

The costs arising from the way inflation makes money a less reliable unit of measurement are known as

unit-of-account costs

prices decreased by 4%

use table 15-3 caculate by how much the prices changed between 2007 and 2008

Which one of the following price indices is commonly used to measure the cost of living?

consumer price index

the ____ is the most widely used measure of inflation in the united states

consumer price index

if the cost of a market basket is $200 in year 1 and $230 in year 2, the price index for year 2 with a year 1 base is

115

you read in the newspaper that the CPI in 2008 was 120, you will conclude that a typical market basket in 2008 would cost

20 percent more than the same market basket purchased in the base year

Which of the following annual rates of inflation would most likely be called hyperinflation? a.5% b. 13% c. 25% d. 2000% e. 15%

2000%

If the CPI is 120 in year 1 and 150 in year 2, then the rate of inflation from year 1 to year 2 is ____.

25%

Suppose the real interest rate is 2.1% and the nominal intrest rate is 5.4% then the expected inflation rate is?

3.3%

Suppose that the nominal rate of interest is 7% and the expected inflation rate is 3% then the real rate of intrest is equal to:

4%

if the cost of a market basket is $150 in year 1 and $200 in year 2, the price index for year 1 with a 2 year base is

75

100%

Use Table 15-1. The approximate rate of inflation in Year 2 is _____ percent.

5%

Use Table 15-1. The approximate rate of inflation in Year 3 is _____ percent.

.20%

Use Table 15-1. The approximate rate of inflation in Year 5 is _____ percent.

D. 2005

Use Table 15-2. Consider the information in the table provided. Which year is most likely to be the base year? A. 2006 B. 2008 C. 2007 D. 2005 E. A year not presented in the table

deflation is when there is

a decreasing aggregate price level

suppose that a country has a progressive income tax code, where taxable income is caculated in nominal terms but the schedual of income taxes rates is NOT indexed to inflation. An individual whose income keeps up with inlation will find that, over time she will pay:

a higher percentage of her in taxes over time

Inflation is when there is

a rising aggregate price level

in periods of unexpected inflation

borrowers benefit since they repay their loans in dollars with lower real value

when inflation rises quickly

borrowers will be hurt and lenders will benefit

The consumer price index reflects the

changes in the prices of goods and services typically purchased by consumers

Deflation is a(n)

decrease in the average level of prices

high rates of inflation often result in people spending inordinate amounts of time trying to make transactions and finding ways to keep the real value of their money from decreasing. This is an example of ______ costs.

shoe leather

The invention of ATM machines reduced

shoe leather costs of inflation

when hyperinflation forces Emily to visit her bank very frequently to keep jer cash holdings to a minimum, economists say that emily is experiencing a:

shoe-leather cost

The inflation or deflation rate is

the change in a price index divided by the initial value of the index

when there is deflation in the economy

the general price level falls

If the actual inflation rate is less than the expected inflation rate:

the lenders gain and the borrowers loose

Unit-of-account costs refer

the loss of reliability of money as a relative unit of measurement

the aggregate price level is

the overall level of prices in the economy

Inflation can be measured by

the percentage change in the CPI