7.2 Economic Effects of Inflation Quiz

What is one major negative effect of inflation on the economy?

• Increase in purchasing power

• Decrease in purchasing power

• Increase in nominal income

• Decrease in nominal income

What does purchasing power refer to?

• The amount of money you earn

• The amount of goods and services you can buy with your money

• The rate of inflation

• The nominal interest rate

What is real income?

• Income measured in current money values, not adjusted for inflation

• The rate of return on investments

• Nominal income adjusted for changes in inflation

• The percentage charged by a lender to a borrower

If the inflation rate is 5% and your nominal income stays the same, what happens to your real income?

• It increases

• It decreases

• It stays the same

• It doubles

What can high inflation create in the economy?

• Stability

• Uncertainty

• Increased purchasing power

• Higher nominal income

What is the real interest rate?

• The rate of return on investments

• The percentage charged by a lender to a borrower, not adjusted for inflation

• The nominal interest rate adjusted for inflation

• The rate of inflation

What happens to Emma, the lender, if the inflation rate is higher than expected?

• She benefits

• She loses out

• She gains more interest

• She receives more money

What happens to Carlos, the borrower, if the inflation rate is higher than expected?

• He loses out

• He pays more real interest

• He benefits

• He receives less money

Which of the following is a flaw of the CPI method as a measurement of inflation?

• It perfectly matches what all consumers buy.

• It accounts for changes in product quality.

• It does not consider the substitution effect.

• It is always accurate.

Which of the following is not an effect of high inflation?

• Borrowers will be disadvantaged.

• Lenders will lose out.

• Borrowers will benefit.

• Savers will lose out.