c.
6 percent.
d.
3 percent.
United States – Analytic – BB-Legal
Understanding and applying econo – Understanding and applying economic models
The Goal of Low Inflation
139. Workers in country A receive an increase in wages of 10 percent at the same time the inflation rate in country A is 8
percent. Workers in country B receive an increase in wages of 3 percent and the inflation rate in country B is 1 percent. In
which country are workers better off?
a.
Country A because their real wages rise by 18 percent.
b.
Country A because their real wages rise by 10 percent.
c.
Country B because the inflation rate is lower.
d.
Neither country because the increase in real wages is the same.
United States – Analytic – BB-Legal
Understanding and applying econo – Understanding and applying economic models
The Goal of Low Inflation
140. Older people often reminisce about the “good old days” when prices were much lower. This is misplaced nostalgia
primarily because in the “good old days,”
a.
prices were not really that low.
b.
wages were much lower also.
c.
people worked longer hours.
d.
people had more leisure time.
United States – Analytic – BB-Legal
Markets, market failure, and ext – Markets, market failure, and externalities
The Goal of Low Inflation
141. If ten years ago the price of a movie ticket was $5 and the average hourly wage was $10, and today the price of a
movie ticket is $8 and the average hourly wage is $20, then
a.
b.
c.
d.
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Analytic
Markets, market failure, and ext – Markets, market failure, and externalities
The Goal of Low Inflation
142. If the price of pizzas has risen from $4 to $5 at the same time that the price of an hour of spinning class has risen
from $20 to $30, then
a.
pizzas have become relatively more expensive.
b.
spinning classes have become relatively more expensive.
c.
the relative prices of pizzas and spinning classes have remained constant.
d.
workers’ real income must have decreased.
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Analytic
Markets, market failure, and ext – Markets, market failure, and externalities
The Goal of Low Inflation
143. During inflationary periods
a.
all prices rise at the rate of inflation.
b.
real wages must necessarily decline.
c.
some prices may fall.
d.
relative prices do not change.
United States – Analytic – BB-Legal
Markets, market failure, and ext – Markets, market failure, and externalities
The Goal of Low Inflation
144. Last year your job at the university cafeteria paid you $9 an hour and the price of a music download was $1.00. This
year your cafeteria job pays $9.90 per hour and download costs $1.10. You are clearly
a.
worse off because of inflation.
b.
worse off because the download is now relatively more expensive.
c.
better off because your wage rate went up.
d.
better off because the download now costs less work.
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Analytic
Markets, market failure, and ext – Markets, market failure, and externalities
The Goal of Low Inflation
145. Changes in relative prices during inflationary periods usually lead to
a.
decreases in real income.
b.
some people gaining real income.
c.
increases in the purchasing power of money.
d.
increases in real income.
Moderate
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Analytic
Markets, market failure, and ext – Markets, market failure, and externalities
The Goal of Low Inflation
146. Older Americans living on a pension and therefore on a fixed income, tend to be made
a.
better off when prices rise.
b.
better off when inflation rates rise.
c.
worse off when prices rise.
d.
worse off when prices fall.
c
Moderate
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Analytic
Markets, market failure, and ext – Markets, market failure, and externalities
The Goal of Low Inflation
BLOOM’S: Comprehension
147. Which of the following groups would most likely be harmed by inflation?
a.
workers
b.
borrowers
c.
debtors
d.
retirees
Moderate
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Analytic
Markets, market failure, and ext – Markets, market failure, and externalities
Inflation as a Redistributor of Income and Wealth
148. Which of the following groups would most likely to benefit from inflation?
a.
borrowers
b.
lenders
c.
creditors
d.
pensioners
a
Moderate
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Analytic
Markets, market failure, and ext – Markets, market failure, and externalities
Inflation as a Redistributor of Income and Wealth
149. Paying into a pension fund while you are earning wages and salaries is equivalent to
a.
borrowing money.
b.
lending money.
c.
withdrawing from a savings account.
d.
paying off debt.
Moderate
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Analytic
Markets, market failure, and ext – Markets, market failure, and externalities
Inflation as a Redistributor of Income and Wealth
150. Workers are generally in a better position to protect themselves from inflation in comparison to retired persons
because workers’ incomes
a.
are more likely to be fixed.
b.
are more likely to be variable.
c.
always rise during inflation.
d.
are guaranteed by the federal government.
Moderate
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Analytic
Markets, market failure, and ext – Markets, market failure, and externalities
Inflation as a Redistributor of Income and Wealth
151. If prices rise, then persons living on fixed incomes will
a.
see their real incomes falling.
b.
see the purchasing power of their savings fall.
c.
need to spend more to maintain their standard of living.
d.
All of the above are true.
Moderate
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Analytic
Markets, market failure, and ext – Markets, market failure, and externalities
Inflation as a Redistributor of Income and Wealth
152. When prices rise
a.
the rich benefit at the expense of the poor.
b.
the poor benefit at the expense of the rich.
c.
both the rich and poor lose real income.
d.
the effect in the rich and poor is uncertain.
Moderate
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Analytic
Markets, market failure, and ext – Markets, market failure, and externalities
Inflation as a Redistributor of Income and Wealth
153. The economic benefits of owning a home are greater when home prices are
a.
falling and interest rates are high.
b.
rising and interest rates are low.
c.
rising and interest rates are high.
d.
falling and interest rates are low.
Difficult
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Analytic
Markets, market failure, and ext – Markets, market failure, and externalities
Inflation as a Redistributor of Income and Wealth
154. Inflation often bestows unearned income on
a.
homeowners.
b.
lenders.
c.
creditors.
d.
fixed income receivers.
a
Moderate
DISC: The study of economics, an – DISC: The study of economics, and definitions in
United States – BPROG: Analytic
The study of economics, and defi – The study of economics, and definitions of economics
Inflation as a Redistributor of Income and Wealth
155. If an economy is experiencing deflation, a decrease in the price level, then the most advantageous actions would be
a.
borrowing money at a fixed interest rate and buying a house.
b.
borrowing money at a fixed interest rate and buying land.
c.
keeping money in a checking account.
d.
keeping your wealth in gold and other precious metals.
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Analytic
Markets, market failure, and ext – Markets, market failure, and externalities
Real Versus Nominal Interest Rates
156. The nominal interest rate is the sum of the
a.
real interest rate and the historic rate of inflation.
b.
real interest rate and the expected rate of inflation.
c.
historic rate of inflation and the expected rate of inflation.
d.
expected rate of inflation and the rate of price level increase.
United States – BPROG: Analytic
The study of economics, and defi – The study of economics, and definitions of economics
Real Versus Nominal Interest Rates
157. When you subtract the expected rate of inflation from the nominal rate of interest, you calculate the
a.
real rate of interest.
b.
real rate of inflation.
c.
expected rate of interest.
d.
expected rate of price increases.
United States – BPROG: Analytic
The study of economics, and defi – The study of economics, and definitions of economics
Real Versus Nominal Interest Rates
158. If both borrowers and lenders anticipate the rate of inflation correctly, then
a.
borrowers will lose real income.
b.
lenders will lose real income.
c.
both borrowers and lenders will lose real income.
d.
neither borrowers nor lenders will lose real income.
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Analytic
Markets, market failure, and ext – Markets, market failure, and externalities
Real Versus Nominal Interest Rates
159. Gladys agrees to lend Kay $1,000 for one year at a nominal rate of interest of 5 percent. At the end of the year prices
have actually risen by 7 percent.
a.
Gladys earns extra real income.
b.
Kay loses extra real income.
c.
Kay receives extra real income.
d.
Neither party gains or loses if the loan is repaid.
United States – BPROG: Analytic
Understanding and applying econo – Understanding and applying economic models
Real Versus Nominal Interest Rates
160. If you as a lender want an increase in purchasing power of 4 percent from making a loan and you set the nominal
interest rate at 9 percent, then your
a.
real rate of interest is 13 percent.
b.
expected rate of inflation is 5 percent.
c.
expected rate of inflation is 13 percent.
d.
real rate of interest is 36 percent.
United States – BPROG: Reflective Thinking – BPROG: Analysis
Understanding and applying econo – Understanding and applying economic models
Real Versus Nominal Interest Rates
161. If borrowers and lenders expect a higher rate of inflation,
a.
nominal interest rates should decrease.
b.
nominal interest rates should remain constant.
c.
nominal interest rates should increase.
d.
real interest rates should increase.
United States – BPROG: Analytic
Understanding and applying econo – Understanding and applying economic models
Real Versus Nominal Interest Rates
162. The rate of interest written on a contract between a borrower and a lender is the
a.
nominal interest rate.
b.
real interest rate.
c.
implied interest rate.
d.
expected interest rate.
United States – BPROG: Analytic
The study of economics, and defi – The study of economics, and definitions of economics
Real Versus Nominal Interest Rates
163. The arithmetic difference between the nominal rate of interest and the expected rate of inflation is the
a.
expected interest rate.
b.
real interest rate.
c.
implied interest rate.
d.
contractual interest rate.
United States – BPROG: Analytic
The study of economics, and defi – The study of economics, and definitions of economics
Real Versus Nominal Interest Rates
164. Rachel agrees to lend Phoebe $100 for six months and charges her interest of 2 percent. At the end of the six-month
period, prices have risen by 4 percent.
a.
Purchasing power has been redistributed to Rachel.
b.
No purchasing power has been redistributed.
c.
Purchasing power has been redistributed to Phoebe.
d.
Both Rachel and Phoebe received extra purchasing power.
United States – BPROG: Analytic
Understanding and applying econo – Understanding and applying economic models
Real Versus Nominal Interest Rates
165. Inflation affects borrowers and lenders differently. After signing a contract with a fixed nominal interest rate, it can
be expected that
a.
borrowers will hope that prices fall.
b.
lenders will hope that prices rise.
c.
lenders will hope that the purchasing power of money will fall.
d.
borrowers will hope that prices rise.
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Analytic
Markets, market failure, and ext – Markets, market failure, and externalities
166. Over the past few decades, nominal interest rates have been higher than real rates of interest. This means that
a.
lenders must have expected inflation.
b.
borrowers must have expected deflation.
c.
lenders must have expected prices to fall.
d.
borrowers must have expected prices to fall.
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
Markets, market failure, and ext – Markets, market failure, and externalities
Real Versus Nominal Interest Rates
167. If inflation is expected by both borrowers and lenders, then we would expect
a.
real rates to be higher than nominal rates of interest.
b.
real rates to be equal to nominal rates of interest.
c.
real rates to be lower than nominal rates of interest.
d.
nominal rates of interest to be less than the expected inflation rate.
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Analytic
Markets, market failure, and ext – Markets, market failure, and externalities
Real Versus Nominal Interest Rates
168. After a particular loan has been paid off, neither the borrower nor the lender has lost purchasing power. Therefore, it
must be true that actual inflation was
a.
greater than expected inflation.
b.
equal to expected inflation.
c.
less than expected inflation.
d.
greater than the nominal rate of interest.
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Reflective Thinking – BPROG: Analysis
Markets, market failure, and ext – Markets, market failure, and externalities
Real Versus Nominal Interest Rates
169. If a borrower arbitrarily gains purchasing power as the result of a particular loan agreement, then
a.
actual inflation was greater than expected inflation.
b.
actual inflation was equal to expected inflation.
c.
actual inflation was less than expected inflation.
d.
the real interest rate was greater than the nominal interest rate.
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPRPOG: Analysis
Markets, market failure, and ext – Markets, market failure, and externalities
Real Versus Nominal Interest Rates
170. If actual inflation is less than the expected rate of inflation, then probably
a.
the borrower gains at the expense of the lender.
b.
neither the borrower nor the lender gains.
c.
the lender gains at the expense of the borrower.
d.
the purchasing power of the borrower is increased.
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Reflective Thinking – BPROG: Analysis
Markets, market failure, and ext – Markets, market failure, and externalities
Real Versus Nominal Interest Rates
171. When a lender underestimates the rate of inflation,
a.
purchasing power is redistributed to the lender.
b.
purchasing power is redistributed to the borrower.
c.
the real rate of interest will be higher than expected.
d.
the nominal interest rate was set too low.
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Reflective Thinking – BPROG: Analysis
Markets, market failure, and ext – Markets, market failure, and externalities
172. Americans viewed the 12 percent mortgage interest rates of the 1980s as exorbitantly high while they considered the
7 percent mortgage interest rates of the late 1990s as reasonable. This represents a confusion of
a.
actual and expected inflation.
b.
real versus nominal inflation.
c.
real versus expected mortgage payments.
d.
real versus nominal interest rates.
United States – Analytic – BB-Legal
Markets, market failure, and ext – Markets, market failure, and externalities
Inflation Distorts Measurements
173. If the nominal interest rate was 12 percent and the inflation rate was 10 percent in 1980, while the nominal interest
rate was 7 percent and the inflation rate was 2 percent in 2001, then
a.
real rates were higher in 2001.
b.
real rates were higher in 1980.
c.
credit was more expensive in 1980.
d.
credit was cheaper in 2001 because the nominal rate was lower.
a
Moderate
United States – BPROG: Analytic
Inflation Distorts Measurements
174. If expected inflation is 12 percent and the publicly regulated electric utility company is legally limited to a 10 percent
rate of return, then we should expect
a.
increased investment by the utility.
b.
expansion of electric power generating capacity.
c.
future power shortages.
d.
excess investment by the electric utility.
c
Moderate
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Analytic
Markets, market failure, and ext – Markets, market failure, and externalities
Inflation Distorts Measurements
175. If an investor had a $25,000 long-term capital gain on a $100,000 investment from 1984 to 2010, her real rate of
return was most likely
a.
equal to the expected rate of inflation.
b.
equal to the nominal rate of inflation.
c.
zero.
d.
negative.
Easy
economics
United States – BPROG: Analytic
The study of economics, and defi – The study of economics, and definitions of economics
Inflation Distorts Measurements
176. If an investor had a $100,000 long-term capital gain on a $100,000 investment from 1984 to 2010, her real rate of
return was most likely
a.
equal to the expected rate of inflation.
b.
positive.
c.
very near zero..
d.
negative.
c
Easy
The study of economics, and defi – The study of economics, and definitions of economics
Inflation Distorts Measurements
177. The difference between the purchase price of a financial asset and the sale price of the asset is called a(n)
a.
capital gain.
b.
dividend.
c.
profit.
d.
investment.
a
Easy
United States – BPROG: Analytic
The study of economics, and defi – The study of economics, and definitions of economics
Inflation Distorts Measurements
178. The federal government collects taxes on
a.
real capital gains.
b.
nominal capital gains.
c.
real capital losses.
d.
nominal capital losses.
Easy
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Inflation Distorts Measurements
179. If you purchased shares of common stock in 1990 for $1,000 and sold them for $2,000 in 2001 you would be liable
for taxes on
a.
$2,000.
b.
$1,000 less the rate of inflation.
c.
$1,000.
d.
$2,000 less the rate of inflation.