Money Growth and Inflation 7489
58.
Given a nominal interest rate of 5 percent, in which of the following cases would you earn the
highest after–tax real
rate of interest?
a.
Inflation is 3 percent; the tax rate is 15 percent.
b.
Inflation is 2 percent; the tax rate is 40 percent.
c.
Inflation is 1 percent; the tax rate is 50 percent.
d.
The after–tax real interest rate is the same for all of the above.
59.
In which of the following cases is the after-tax real interest rate highest?
a.
inflation is 6%, the pre-tax real interest rate is 3%, and the tax rate is 20%.
b.
inflation is 6%, the pre-tax real interest rate is 3%, and the tax rate is 25%.
c.
inflation is 4%, the pre-tax real interest rate is 2%, and the tax rate is 20%.
d.
inflation is 4%, the pre-tax real interest rate is 2%, and the tax rate is 25%.
60.
Suppose that in some tax year you earned a nominal interest rate of 6 percent. During the time
you held these funds
inflation was 1 percent. You compute that you made a real after-tax interest
rate of 3 percent. What was your tax
rate?
a.
40 percent.
b.
33.3 percent.
c.
25 percent.
d.
50 percent.
61.
Serena purchased 10 shares of GLC, Inc. stock for $200 per share; one year later she sold the 10
shares for $220 a
share. Over the year, the price level increased from 135.0 to 143.1. The tax rate
on capital gains is 50 percent. If the
capital gains tax is on nominal gains, how much tax does
Serena pay on her gain?
a. $90
b. b. $95
c. c. $100
d. None of the above is correct.
62.
Suppose one year ago the price index was 120 and Maria purchased $20,000 worth of bonds.
One year later the
price index is 126. Maria redeems her bonds for $22,700 and is in a 40 percent
tax bracket. What is Maria’s real
after-tax rate of interest to the nearest tenth of a percent?
a.
5.1 percent
b.
3.1 percent
c.
2.1 percent
d.
2.4 percent
63.
The country of Lessidinia has a tax system identical to that of the United States. Suppose
someone in Lessidinia
bought a parcel of land for 20,000 foci (the local currency) in 1960 when
the price index equaled 100. In 2002, the
person sold the land for 100,000 foci, and the price index
equaled 600. The tax rate on nominal gains was 20 percent.
Compute the taxes on the nominal
gain and the change in the real value of the land in terms of 2002 prices to find the
after-tax real
rate of capital gain.
a.
-60 percent
b.
-30 percent
c.
30 percent
d.
60 percent
64.
The country of Robinya has a tax system identical to that of the United States. Suppose someone
in Robinya bought
a parcel of land for 10,000 deera (the local currency) in 1970 when the price
index equaled 100. In 2010, the person
sold the land for 100,000 deera, and the price index
equaled 500. The tax rate on nominal capital gains was 20
percent. Compute the taxes the person
paid on the nominal gain and the change in the real value of the land in terms
of 2010 prices to
find the after-tax real rate of capital gain.
a.
-20 percent
b.
20 percent
c.
42 percent
d.
64 percent
65.
Kaitlyn purchased one share of Northwest Energy stock for $200; one year later she sold that
share for $400. The
inflation rate over the year was 50 percent. The tax rate on nominal capital
gains is 50 percent. What was the tax on
Kaitlyn’s capital gain?
a.
$50
b.
$75
c.
$100
d.
$200
66.
Steve purchases some land for $30,000. He maintains it, but makes no improvements to it. One
year later he sells it
for $32,000. Stephanie puts $30,000 in a savings account that pays 6%
interest. Steve has to pay the 50% capital
gains tax, Stephanie is in the 35% tax bracket. The
inflation rate was 2%. Who had the higher before-tax real gain
and who had the higher after-tax
real gain?
a.
Steve had both the higher before–tax real gain and the higher after-tax real gain.
b.
Steve had the higher before-tax real gain but Stephanie had the higher after–tax real gain.
c.
Stephanie had the higher before-tax real gain but Steve had the higher after–tax real gain.
d.
Stephanie had both the higher before-tax real gain and the higher after–tax real gain.
67.
Indexing the tax system to take into account the effects of inflation would by itself
a.
mean that only real interest earnings are taxed.
b.
mean an end to taxing capital gains.
c.
mean an increase in average tax rates.
d.
All of the above are correct.
68.
Which of the following costs of inflation can be significant even if actual inflation and expected
inflation are the
same?
a.
menu costs
b.
inflation tax
c.
shoeleather costs
d.
All of the above are correct.
69.
Which of the following is correct? Inflation
a.
impedes financial markets in their role of allocating resources.
b.
reduces the purchasing power of the average consumer.
c.
generally increases after-tax real interest rates.
d.
is most costly when anticipated.
70.
Jennifer took out a fixed-interest-rate loan when the CPI was 100. She expected the CPI to
increase to 103 but it
actually increased to 105. The real interest rate she paid is
a.
higher than she had expected, and the real value of the loan is higher than she had expected.
b.
higher than she had expected, and the real value of the loan is lower than she had expected.
c.
lower than she had expected, and the real value of the loan is higher than she had expected.
d.
lower then she had expected, and the real value of the loan is lower than she had expected.
71.
James took out a fixed-interest-rate loan when the CPI was 200. He expected the CPI to increase
to 206 but it
actually increased to 204. The real interest rate he paid is
a.
higher than he had expected, and the real value of the loan is higher than he had expected.
b.
higher than he had expected, and the real value of the loan is lower than he had expected.
c.
lower than he had expected, and the real value of the loan is higher than he had expected.
d.
lower then he had expected, and the real value of the loan is lower than he had expected.
72.
Wealth is redistributed from debtors to creditors when inflation was expected to be
a.
high and it turns out to be high.
b.
low and it turns out to be low.
c.
low and it turns out to be high.
d.
high and it turns out to be low.
73.
Wealth is redistributed from creditors to debtors when inflation was expected to be
a.
high and it turns out to be high.
b.
low and it turns out to be low.
c.
low and it turns out to be high.
d.
high and it turns out to be low.
74.
Wealth is redistributed from creditors to debtors when inflation is
a.
high, whether it is expected or not.
b.
low, whether it is expected or not.
c.
unexpectedly high.
d.
unexpectedly low.
75.
Wealth is redistributed from debtors to creditors when inflation is
a.
high, whether it is expected or not.
b.
low, whether it is expected or not.
c.
unexpectedly high.
d.
unexpectedly low.
76.
If inflation is higher than what was expected,
a.
creditors receive a lower real interest rate than they had anticipated.
b.
creditors pay a lower real interest rate than they had anticipated.
c.
debtors receive a higher real interest rate than they had anticipated.
d.
debtors pay a higher real interest rate than they had anticipated.
77.
During the last tax year you lent money at a nominal rate of 6 percent. Actual inflation was 1
percent, but people had
been expecting 1.5 percent. This difference between actual and expected
inflation
a.
transferred wealth from the borrower to you and caused your after-tax real interest rate to be
0.5 percentage
points higher than what you had expected.
b.
transferred wealth from the borrower to you and caused your after–tax real interest rate to be
more than 0.5
percentage points higher than what you had expected.
c.
transferred wealth from you to the borrower and caused your after-tax real interest rate to be
0.5 percentage
points lower than what you had expected.
d.
transferred wealth from you to the borrower and caused your after-tax real interest rate to be
more than 0.5
percentage points lower than what you had expected.
78.
During the last tax year you lent money at a nominal rate of 6 percent. Actual inflation was 1.5
percent, but people
had been expecting 1 percent. This difference between actual and expected
inflation
a.
transferred wealth from the borrower to you and caused your after-tax real interest rate to be
0.5 percentage
points higher than what you had expected.
b.
transferred wealth from the borrower to you and caused your after–tax real interest rate to be
more than 0.5
percentage points higher than what you had expected.
c.
transferred wealth from you to the borrower and caused your after-tax real interest rate to be
0.5 percentage
points lower than what you had expected.
d.
transferred wealth from you to the borrower and caused your after-tax real interest rate to be
more than 0.5
percentage points lower than what you had expected.
79.
If the economy unexpectedly went from inflation to deflation,
a.
both debtors and creditors would have reduced real wealth.
b.
both debtors and creditors would have increased real wealth.
c.
debtors would gain at the expense of creditors.
d.
creditors would gain at the expense of debtors.
80.
If inflation is lower than what was expected,
a.
creditors receive a lower real interest rate than they had anticipated.
b.
creditors pay a lower real interest rate than they had anticipated.
c.
debtors receive a higher real interest rate than they had anticipated.
d.
debtors pay a higher real interest rate than they had anticipated.
81.
Yvonne takes out a fixed-interest-rate loan and then inflation turns out to be higher than she had
expected it to be. The real interest rate she pays is
a.
higher than she had expected, and the real value of the loan is higher than she had expected.
b.
higher than she had expected, and the real value of the loan is lower than she had expected.
c.
lower than she had expected, and the real value of the loan is higher than she had expected.
d.
lower then she had expected, and the real value of the loan is lower than she had expected.
82.
Marta lends money at a fixed interest rate and then inflation turns out to be higher than she had
expected it to be. The real interest rate she earns is
a.
higher than she had expected, and the real value of the loan is higher than she had expected.
b.
higher than she had expected, and the real value of the loan is lower than she had expected.
c.
lower than she had expected, and the real value of the loan is higher than she had expected.
d.
lower then she had expected, and the real value of the loan is lower than she had expected.
83.
Tara deposits money into an account with a nominal interest rate of 6 percent. She expects
inflation to be 2 percent. Her tax rate is 20 percent. Tara’s after-tax real rate of interest
a.
will be 2.8 percent if inflation turns out to be 2 percent; it will be higher if inflation turns out to
be higher than 2
percent.
b.
will be 2.8 percent if inflation turns out to be 2 percent; it will be lower if inflation turns out to
be higher than 2
percent.
c.
will be 3.2 percent if inflation turns out to be 2 percent; it will be higher if inflation turns out to
be higher than 2
percent.
d.
will be 3.2 percent if inflation turns out to be 2 percent; it will be lower if inflation turns out to
be higher than 2
percent.
84.
Sam deposits money into an account with a nominal interest rate of 4 percent. He expects
inflation to be 1.5 percent. His tax rate is 32 percent. Sam’s after-tax real rate of interest
a.
will be 1.2 percent if inflation turns out to be 1.5 percent; it will be higher if inflation turns out to
be lower than 1.5 percent.
b.
will be 1.2 percent if inflation turns out to be 1.5 percent; it will be lower if inflation turns out to
be lower than 1.5 percent.
c.
will be 1.7 percent if inflation turns out to be 1.5 percent; it will be higher if inflation turns out to
be lower than 1.5 percent.
d.
will be 1.7 percent if inflation turns out to be 1.5 percent; it will be lower if inflation turns out to
be lower than 1.5 percent.
85.
If people had been expecting prices to rise but in fact prices fell, then who among the following
would benefit?
a.
lenders and people holding a lot of currency
b.
lenders but not people holding a lot of currency
c.
people holding a lot of currency but not lenders
d.
neither lenders nor people holding a lot of currency
86.
High and unexpected inflation has a greater cost
a.
for those who borrow than for those who save.
b.
for those who hold a little money than for those who hold a lot of money.
c.
for those whose wages increase by as much as inflation than for those who are paid a fixed
nominal wage.
d.
for savers in high income tax brackets than for savers in low income tax brackets.
87.
High and unexpected inflation has a greater cost
a.
for those who save than for those who borrow.
b.
for those who hold a little money than for those who hold a lot of money.
c.
for those whose wages increase by as much as inflation than those who are paid a fixed
nominal wage.
d.
for savers in low income tax brackets than for savers in high income tax brackets.
88.
High and unexpected inflation has a greater cost
a.
for those who borrow than for those who save.
b.
for those who hold a little money than for those who hold a lot of money.
c.
for those who have fixed nominal wages than for those who have nominal wages that adjust
with inflation.
d.
All of the above are correct.
89.
Between 1880 and 1886, prices that were
a.
lower than expected transferred wealth from creditors to debtors.
b.
lower than expected transferred wealth from debtors to creditors.
c.
higher than expected transferred wealth from creditors to debtors.
d.
higher than expected transferred wealth from debtors to creditors.
90.
In 1898, prospectors on the Klondike River discovered gold. This discovery caused an unexpected
price level
a.
decrease that benefited creditors at the expense of debtors.
b.
decrease that benefited debtors at the expense of creditors.
c.
increase that benefited creditors at the expense of debtors.
d.
increase that benefited debtors at the expense of creditors.
91.
Which movie is an allegory about late 19th century monetary policy?
a.
The Wizard of Oz
b.
Mary Poppins
c.
It’s a Wonderful Life
d.
Trading Places
92.
You bought some shares of stock and, over the next year, the price per share decreased by 7
percent and the price
level decreased by 9 percent. Before taxes, you experienced
a.
both a nominal gain and a real gain.
b.
a nominal gain and a real loss.
c.
a nominal loss and a real gain.
d.
both a nominal loss and a real loss.
93.
Which of the following is correct?
a.
Inflation impedes financial markets in their role of allocating savings to alternative investments.
b.
Inflation encourages savings through the tax treatment on capital gains.
c.
Inflation encourages larger holdings of currency by the public.
d.
Inflation reduces people’s real purchasing power.
Multiple Choice – Section 03: Conclusion
1.
In order to maintain stable prices, a central bank must
a.
maintain low interest rates.
b.
keep unemployment low.
c.
tightly control the money supply.
d.
sell indexed bonds.
2.
Which of the following is accurate?
a.
Monetary policy is neutral in both the short run and the long run.
b.
Though monetary policy is neutral in the long run, it may have effects on real variables in the
short run.
c.
Monetary policy has profound effects on real variables in both the short run and the long run.
d.
Monetary policy has profound effects on real variables in the long run, but is neutral in the short
run.
True/False and Short Answer
1.
The inflation rate is measured as the percentage change in a price index.
a.
True
b.
False
2.
U.S. prices rose at an average annual rate of about 3.6 percent over the last 80 years.
a.
True
b.
False
3.
The United States has never had deflation.
a.
True
b.
False
4.
In United States history there were long periods when most prices fell.
a.
True
b.
False