Suppose you borrow $100 from a bank at 5 percent interest for one year and the inflation rate that year is 10 percent. Was this loan advantageous to you or to the bank? Suppose the annual nominal rate of interest on a bank certificate of deposit is 12 percent. What would be the effect of […]

When the inflation rate rises, the purchasing power of nominal income a. remains unchanged.b. decreases.c. increases.d. changes by the inflation rate minus one.

Last year the Harrison family earned $50,000. This year their income is $52,000. In an economy with an inflation rate of 5 percent, which of the following is correct? a. The Harrison’s nominal income and real income have both risen.b. The Harrison’s nominal income and real income have both fallen.c. The Harrison’s nominal income has

If the nominal rate of interest is less than the inflation rate, a. lenders win.b. savers win.c. the real interest rate is negative.d. the economy is at full employment.

Demand-pull inflation is caused by a. monopoly power.b. energy cost increases.c. tax increases.d. full employment.

Cost-push inflation is due to a. excess total spending.b. too much money chasing too few goods.c. resource cost increases.d. the economy operating at full employment.

Suppose you place $10,000 in a retirement fund that earns a nominal interest rate of 8 percent. If you expect inflation to be 5 percent or lower, then you are expecting to earn a real interest rate of at least a. 1.6 percent.b. 3 percent.c. 4 percent.d. 5 percent.

Which of the following statements is true? a. Demand-pull inflation is caused by excess total spending.b. Cost-push inflation is caused by an increase in resource costs.c. If nominal interest rates remain the same and the inflation rate falls, real interest rates increase.d. If real interest rates are negative, lenders incur loses.e. All of the answers

Explain how the classical economists concluded that Say’s Law is valid and long-term unemployment is impossible. Use the following consumption function data to answer the questions next. a. Calculate the saving schedule.b. Determine the marginal propensities to consume (MPC) and save (MPS).c. Determine the break-even income.d. What is the relationship between the MPC and the

Explain why the MPC and the MPS must always add up to one. How do households “dissave”? Explain how each of the following affects the consumption function: a. The expectation is that a prolonged recession will occur in the next year.b. Stock prices rise sharply.c. The price level rises by 10 percent.d. The interest rate