1A-1D Review

Suppose that the real interest rate is equal to seven percent and the expected inflation rate is currently three percent. If an oil crisis in the Middle East increases the expected inflation rate to four percent, the new nominal interest rate is equal to

• 3%

• 7%

• 4%

• 11%

• 14%

• A

• B

• C

• D

• E

The consumer price index (CPI) is designed to measure changes in the

• spending patterns of urban consumers only

• spending patterns of all consumers

• wholesale price of manufactured goods

• prices of all goods and services produced in an economy

• cost of a select market basket of goods

If a worker's nominal wage rate increases from $10 to $12 per hour and at the same time the general price level increases by 10 percent, the worker's real wage has

• approximately decreased by 10%

• approximately decreased by 20%

• approximately increased by 10%

• approximately increased by 20%

• not changed

The annual inflation rate is expected to be 5 percent over the next 3 years. Juan plans to take out a 3-year loan to purchase an automobile. If Juan decides not to take out the loan if the real interest rate exceeds 3 percent, the highest nominal interest rate he would be willing to pay is

• 2 percent

• 3 percent

• 8 percent

• 15 percent

• 25 percent

Which of the following groups would most likely gain from unanticipated inflation?

• Landlords who own apartments in cities with rent controls

• Individuals who have fixed retirement incomes

• Individuals who earn high incomes

• Individuals who have borrowed money at fixed interest rates

• Banks that have loaned all excess reserves at a fixed interest rate

Assume that the nominal interest rate is 10 percent. If the expected inflation rate is 5 percent, the real interest rate is

• 0.5%

• 2%

• 5%

• 10%

• 15%

In the country of Agronomia, banks charge 10 percent interest on all loans. If the general price level has been increasing at the rate of 4 percent per year, the real rate of interest in Agronomia is

• 14%

• 10%

• 6%

• 4%

• 2.5%

Which of the following would be true if the actual rate of inflation were less than the expected rate of inflation?

• Inflation had been underpredicted

• The real interest rate had exceeded the nominal interest rate

• The real interest rate had been negative

• People who borrowed funds at the nominal interest rate during this time period would lose

• The economy would expand because of increased investment and spending

If real gross domestic product is increasing at 3 percent per year and nominal gross domestic product is increasing at 7 percent per year, which of the following is necessarily true?

• Unemployment is increasing

• The price level is increasing

• Exports exceed imports

• The economy is in recession

• The government is running a budget deficit