Question 1

If people always perfectly anticipated and adjusted to the inflation rate, then

Accepted Answer

A) real interest rates would be zero 
B) there would be no menu costs 
C) they would still have to worry about shoe-leather costs 
D) the costs of inflation to society would be zero 
E) none of the above 
A) real interest rates would be zero 
B) there would be no menu costs 
C) they would still have to worry about shoe-leather costs 
D) the costs of inflation to society would be zero 
E) none of the above

Question 2

The real return on a bond that pays a fixed interest is equal to

Accepted Answer

A) the nominal interest rate plus the rate of inflation 
B) the nominal interest rate divided by the rate of inflation 
C) the nominal interest rate minus the rate of inflation 
D) the nominal interest rate times the rate of inflation 
E) the interest rate that is stated on the bond 
A) the nominal interest rate plus the rate of inflation 
B) the nominal interest rate divided by the rate of inflation 
C) the nominal interest rate minus the rate of inflation 
D) the nominal interest rate times the rate of inflation 
E) the interest rate that is stated on the bond

Question 3

Which of the following is TRUE, if inflation could be always perfectly anticipated?

Accepted Answer

A) no costs to society arise from inflation 
B) there are no shoe-leather costs 
C) there are no menu costs 
D) currency holders would not experience any loss of purchasing power 
E) none of the above 
A) no costs to society arise from inflation 
B) there are no shoe-leather costs 
C) there are no menu costs 
D) currency holders would not experience any loss of purchasing power 
E) none of the above

Question 4

If you had $2,000 in a savings account that paid 4% interest compounded annually, what would be the real value of your savings after two years if the annual inflation rate were 2%?

Accepted Answer

A) $2,040 
B) $2,081 
C) $2,160 
D) $1,163 
E) $2,247 
A) $2,040 
B) $2,081 
C) $2,160 
D) $1,163 
E) $2,247

Question 5

Assume you financed a new house with a 30-year fixed rate mortgage at a 6% annual interest.rate.If you can deduct your mortgage interest payments from your taxable income and you are in the 30% tax bracket, what would be the real after-tax cost of borrowing if the average annual inflation rate is 4.2% over the 30-years period?

Accepted Answer

A) +4.2% 
B) +1.8% 
C) +1.2% 
D) 0% 
E) -1.2% 
A) +4.2% 
B) +1.8% 
C) +1.2% 
D) 0% 
E) -1.2%

Question 6

In countries where inflation is high and volatile, partial protection from the cost of inflation can be provided by

Accepted Answer

A) the indexation of debt 
B) wage indexation 
C) cost-of-living adjustments 
D) all of the above 
E) none of the above 
A) the indexation of debt 
B) wage indexation 
C) cost-of-living adjustments 
D) all of the above 
E) none of the above

Question 7

Why are governments so reluctant to adopt widespread wage indexation?

Accepted Answer

A) it will make it more difficult to adjust to an adverse supply shock 
B) widespread wage indexation is very complicated in practice 
C) it may result in less political will to fight high inflation 
D) all of the above 
E) only A and C 
A) it will make it more difficult to adjust to an adverse supply shock 
B) widespread wage indexation is very complicated in practice 
C) it may result in less political will to fight high inflation 
D) all of the above 
E) only A and C

Question 8

The menu cost of inflation arises since

Accepted Answer

A) people hold less currency if inflation is positive and thus they take more trips to the bank 
B) the central bank eventually has to restrict money supply and this causes an increase in the unemployment rate 
C) lenders are less likely to give out loans and this has a negative impact on economic activity 
D) resources have to be devoted to marking up prices and changing vending machines and cash registers 
E) real wages and real money holdings lose purchasing power 
A) people hold less currency if inflation is positive and thus they take more trips to the bank 
B) the central bank eventually has to restrict money supply and this causes an increase in the unemployment rate 
C) lenders are less likely to give out loans and this has a negative impact on economic activity 
D) resources have to be devoted to marking up prices and changing vending machines and cash registers 
E) real wages and real money holdings lose purchasing power

Question 9

An individual can, to some degree, reduce her vulnerability to high and unanticipated inflation by

Accepted Answer

A) insisting on long-term wage contracts 
B) holding long-term bonds 
C) holding cash 
D) wage indexation 
E) all of the above 
A) insisting on long-term wage contracts 
B) holding long-term bonds 
C) holding cash 
D) wage indexation 
E) all of the above

Question 10

If inflation this year is higher than expected, then

Accepted Answer

A) borrowers will gain at the expense of lenders 
B) lenders will gain at the expense of borrowers 
C) both lenders and borrowers will gain and the government will lose 
D) both lenders and borrowers will lose 
E) the government will lose unless it has implemented an indexed tax system 
A) borrowers will gain at the expense of lenders 
B) lenders will gain at the expense of borrowers 
C) both lenders and borrowers will gain and the government will lose 
D) both lenders and borrowers will lose 
E) the government will lose unless it has implemented an indexed tax system

Question 11

A zero inflation target

Accepted Answer

A) eliminates the short-run unemployment-inflation tradeoff 
B) is almost impossible to achieve since it would require an extremely high natural rate of unemployment 
C) can only be achieved if wage indexation is implemented nationwide 
D) will have much lower costs than an explicit target of achieving a 4% long-term inflation rate 
E) may not be as good as a positive inflation target, because it makes it more difficult to achieve full employment 
A) eliminates the short-run unemployment-inflation tradeoff 
B) is almost impossible to achieve since it would require an extremely high natural rate of unemployment 
C) can only be achieved if wage indexation is implemented nationwide 
D) will have much lower costs than an explicit target of achieving a 4% long-term inflation rate 
E) may not be as good as a positive inflation target, because it makes it more difficult to achieve full employment

Question 12

When considering the effects of widespread wage indexing

Accepted Answer

A) one has to distinguish between demand shocks and supply shocks 
B) one always comes to the conclusion that they are ill-suited to protect against the loss of purchasing power 
C) one quickly realizes the benefits arising from less real wage rate rigidity 
D) one realizes that it is very hard to tie nominal wages to a specific price index 
E) none of the above 
A) one has to distinguish between demand shocks and supply shocks 
B) one always comes to the conclusion that they are ill-suited to protect against the loss of purchasing power 
C) one quickly realizes the benefits arising from less real wage rate rigidity 
D) one realizes that it is very hard to tie nominal wages to a specific price index 
E) none of the above

Question 13

If you had $4,000 in a savings bank that pays you 2% interest per year, what would be the real value of your savings after 2 years and the yearly inflation rate were 3% per year?

Accepted Answer

A) $3,959 
B) $4,080 
C) $4, 162 
D) $4,244 
E) $4,410 
A) $3,959 
B) $4,080 
C) $4, 162 
D) $4,244 
E) $4,410

Question 14

Generally, the holder of a government bond that is indexed to the price level knows

Accepted Answer

A) either the interest rate, the principal, or both are adjusted for inflation 
B) the real interest rate will fluctuate with inflation 
C) there will be no losses as long as inflation is anticipated, but losses can occur if there is an unanticipated increase in the inflation rate 
D) all of the above 
E) none of the above 
A) either the interest rate, the principal, or both are adjusted for inflation 
B) the real interest rate will fluctuate with inflation 
C) there will be no losses as long as inflation is anticipated, but losses can occur if there is an unanticipated increase in the inflation rate 
D) all of the above 
E) none of the above

Question 15

Economists tend to agree that

Accepted Answer

A) the best inflation target is a zero percent inflation rate 
B) the best inflation target is a two percent inflation rate 
C) policy makers should never set inflation targets 
D) any inflation target is fine, as long as policy makers announce it in advance 
E) it is silly to think that all economists will ever agree on anything 
A) the best inflation target is a zero percent inflation rate 
B) the best inflation target is a two percent inflation rate 
C) policy makers should never set inflation targets 
D) any inflation target is fine, as long as policy makers announce it in advance 
E) it is silly to think that all economists will ever agree on anything

Question 16

The losses from holding currency were highest in the period from

Accepted Answer

A) 1960-69 
B) 1970-79 
C) 1980-89 
D) 1990-99 
E) 2000-09 
A) 1960-69 
B) 1970-79 
C) 1980-89 
D) 1990-99 
E) 2000-09

Question 17

The full indexation of wages and prices

Accepted Answer

A) is widespread in most industrial countries 
B) would ensure that each year's inflation rate could always be correctly anticipated 
C) would cause some real wage rigidities 
D) would greatly help an economy to adjust back to full employment after a supply shock 
E) would eliminate all lags between measuring price changes and making wage payments 
A) is widespread in most industrial countries 
B) would ensure that each year's inflation rate could always be correctly anticipated 
C) would cause some real wage rigidities 
D) would greatly help an economy to adjust back to full employment after a supply shock 
E) would eliminate all lags between measuring price changes and making wage payments

Question 18

If this year's inflation rate was lower than expected, then

Accepted Answer

A) a transfer of wealth from the poor to the rich would occur 
B) the government would gain tax revenues unless it had an indexed tax system 
C) lenders would gain at the expense of borrowers 
D) borrowers would gain at the expense of lenders 
E) nominal wage rates would increase 
A) a transfer of wealth from the poor to the rich would occur 
B) the government would gain tax revenues unless it had an indexed tax system 
C) lenders would gain at the expense of borrowers 
D) borrowers would gain at the expense of lenders 
E) nominal wage rates would increase

Question 19

In which time period was the average real yield on a ten-year Treasury bond the lowest?

Accepted Answer

A) 1960 to 1969 
B) 1970 to 1979 
C) 1980 to 1989 
D) 1990 to 1999 
E) 2000 to 2009 
A) 1960 to 1969 
B) 1970 to 1979 
C) 1980 to 1989 
D) 1990 to 1999 
E) 2000 to 2009

Question 20

If inflation were always completely unanticipated, then

Accepted Answer

A) the real rate of return on interest-bearing assets could not be easily predicted 
B) real interest rates would always be negative 
C) menu costs would not occur 
D) there would not be a need for wage indexation 
E) all of the above 
A) the real rate of return on interest-bearing assets could not be easily predicted 
B) real interest rates would always be negative 
C) menu costs would not occur 
D) there would not be a need for wage indexation 
E) all of the above

Exam 8: Inflation

If people always perfectly anticipated and adjusted to the inflation rate, then

The real return on a bond that pays a fixed interest is equal to

Which of the following is TRUE, if inflation could be always perfectly anticipated?

If you had $2,000 in a savings account that paid 4% interest compounded annually, what would be the real value of your savings after two years if the annual inflation rate were 2%?

In countries where inflation is high and volatile, partial protection from the cost of inflation can be provided by

Why are governments so reluctant to adopt widespread wage indexation?

The menu cost of inflation arises since

An individual can, to some degree, reduce her vulnerability to high and unanticipated inflation by

If inflation this year is higher than expected, then

A zero inflation target

When considering the effects of widespread wage indexing

If you had $4,000 in a savings bank that pays you 2% interest per year, what would be the real value of your savings after 2 years and the yearly inflation rate were 3% per year?

Generally, the holder of a government bond that is indexed to the price level knows

Economists tend to agree that

The losses from holding currency were highest in the period from

The full indexation of wages and prices

If this year's inflation rate was lower than expected, then

In which time period was the average real yield on a ten-year Treasury bond the lowest?

If inflation were always completely unanticipated, then

Introduction

National income accounting

Growth and accumulation

Growth and policy

Aggregate supply and demand

Aggregate supply and the phillips curve

Unemployment

Policy preview

Income and spending

Money, interest, and income

Monetary and fiscal policy

International linkages

Consumption and saving

Investment spending

The demand for money

The fed, money, and credit

Policy

Financial markets and asset prices

The national debt

Recession and depression

Inflation and hyperinflation

International adjustment and interdependence

Advanced topics

Filters