Question

25. A relative price is:

A. the rate of inflation. B. a measure of overall prices at a particular point in time. C. the percentage change in a price index such as the CPI. D. the price of a specific good in comparison to the prices of other goods and services.

26.a specific good in comparison with other goods and services are called _______.

A. quality adjustments; substitution bias. B. changes in a relative price; inflation. C. inflation; changes in a relative price. D. price level adjustments; quality adjustments.

27. Suppose the value of the CPI is 1.10 in year 1, 1.16 in year 2, and 1.27 in year 3. Assume also that the price of computers increases by 3% between year 1 and year 2, and by another 3% between year 2 and year 3. The price level is increasing, the inflation rate is _______, and the relative price of computers is _________.

A. increasing; increasing B. constant; increasing C. constant; decreasing D. increasing; decreasing

28. Inflation _____ the signals sent by price changes to demanders and suppliers of goods and services.

A. amplifies B. obscures C. enhances D. has no impact on

29. The phenomenon known as _____ occurs when inflation causes people to pay an increasing percentage of their income in taxes even when their real incomes have not changed.

A. hyperinflation B. bracket creep C. the Fisher effect D. substitution bias

30. The shoe leather costs of inflation include all of the following EXCEPT:

A. the lost purchasing power of cash. B. the extra costs incurred to avoid holding cash. C. the cost of more frequent trips to the bank. D. the installation of a new cash management system. 31. Ann's Cookie Shop needs $1,000 cash per day for customer transactions. Ann has a choice between going to the bank first thing on Monday morning to withdraw $5,000 - enough cash for the whole week - or going to the bank first thing every morning for $1,000 each time. Ann puts the cost of going to the bank at $1 per trip. Assume that funds left in the bank earn precisely enough interest to keep their purchasing power unaffected by inflation. Ann's Cookie shop is open 5 days a week for 50 weeks each year. If Ann goes to the bank everyday when the inflation rate is 10%, then the annual cost of going to the bank is _____ and Ann's annual losses from holding cash are _____.

A. $50;$5,000 B. $50;$1,000 C. $250; $100 D. $250; $1,000

32. If workers and employers agree to a three-year wage contract expecting 3% inflation and inflation turns out to be 5%, then:

A. workers gain and employers gain. B. workers gain and employers lose. C. workers lose and employers gain. D. workers lose and employers lose.

33. When inflation turns out to be different than expected, wealth is ______.

A. destroyed B. redistributed C. increased D. decreased

34. It is difficult to engage in long-term financial planning when inflation is:

A. high and erratic. B. low and stable. C. accounted for through indexing. D. predictable.

35. The real interest rate is the:

A. market interest rate. B. annual percentage increase in the nominal value of a financial asset. C. annual percentage increase in the purchasing power of a financial asset. D. the interest rate charged on a loan in dollar terms.

36. The annual increase in the dollar value of a financial asset is called the:

A. real rate of return. B. inflation rate. C. real interest rate. D. nominal interest rate.

37. The market interest rate in Alpha is 7% and the market interest rate in Beta is 10%, but the inflation rate in Alpha is 3% and inflation rate in Beta is 8%. Which of the following statements is true?

A. The real interest rate is higher in Alpha, but the nominal interest rate is higher in Beta. B. The real interest rate is lower in Alpha, but the nominal interest rate is lower in Beta. C. Both the real and nominal interest rates are higher in Alpha. D. Both the real and nominal interest rates are higher in Beta.

38. On January 1, 2004, Anna invested $5,000 at 5% interest for one year. The CPI on January 1, 2004 stood at 1.60. On January 1, 2005, the CPI was 1.68. The real rate of interest earned by Anna was ____ percent.

A. -5 B. 0 C. 5 D. 8

39. Unexpectedly high inflation ______ borrowers and _____ lenders. A. helps; hurts B. helps; helps C. hurts; hurts D. hurts; helps 40. The Fisher effect is the tendency for ____ interest rates to be ______ when inflation is high.

A. real; high B. real; low C. market; low D. nominal; high

Answer 1