Question : 13.7   Does Inflation Impose Costs the Economy? 1) Suppose that in : 1244733

13.7   Does Inflation Impose Costs on the Economy?

1) Suppose that in 2014, all prices in the economy double and that all wages and salaries also double. In 2014 you

A) are worse off than you were in 2013 as you can no longer afford to buy as many goods and services.

B) are better off than you were in 2013 as your salary is higher than it was in 2013 and you can now buy more goods and services.

C) are no better off or worse off than you were in 2013 as the purchasing power of your salary has remained the same.

D) cannot determine whether you are better off or worse off than you were in 2013, because the purchasing power of your salary cannot be determined.

2) Which of the following describes a situation in which the person is hurt by inflation?

A) a retiree whose pension is adjusted for inflation

B) a person who borrows money during a period when inflation is under-predicted

C) a person who lends money during a period when inflation is over-predicted

D) a person paid a fixed income during an inflationary period

3) If inflation is positive and is perfectly anticipated

A) those that borrow money lose.

B) those that lend money lose.

C) those that hold paper money lose.

D) no one in the economy loses.

4) Suppose that at the beginning of a loan contract, the real interest rate is 4% and expected inflation is currently 6%. If actual inflation turns out to be 7% over the loan contract period, then

A) borrowers gain 1% of the loan value.

B) lenders gain 1% of the loan value.

C) borrowers lose 3% of the loan value.

D) lenders gain 3% of the loan value.

5) The cost to firms of changing prices

A) is small even when there is rapid inflation.

B) is called a menu cost.

C) does not exist if inflation is perfectly anticipated.

D) all of the above

6) When actual inflation is less than expected inflation

A) borrowers lose and lenders gain.

B) borrowers gain and lenders lose.

C) borrowers and lenders both gain.

D) borrowers and lenders both lose.

7) Which of the following is not an example of inflation causing a redistribution of income because the inflation was unanticipated?

A) A firm signs a 3-year contract with a union based on a 2 percent anticipated rate of inflation per year, and the actual rate of inflation ends up being 7 percent per year.

B) A worker receives a raise in salary that is less than the rate of inflation, because management under-predicted inflation.

C) Firms have to hire an extra worker to change prices in its store because of inflation.

D) A bank collects a lower amount of interest from a loan because inflation was under-predicted.

8) If an economy experiences deflation, the real interest rate

A) will be less than the nominal interest rate.

B) will be negative when the nominal interest rate is positive.

C) will be greater than the nominal interest rate.

D) will be equal to the deflation rate, so long as the nominal interest rate is positive.

9) Which of the following individuals would be most negatively affected by anticipated inflation?

A) a retired railroad engineer who receives a fixed income payment every month

B) a union contractor whose pay is adjusted based on changes in the CPI

C) a full-time employee at a pizza parlor who makes more than the minimum wage

D) a student who borrows $10,000 at a nominal interest rate of 5% to finance educational expenses

10) If inflation is completely anticipated

A) no one loses in the economy.

B) borrowers lose in the economy.

C) lenders lose in the economy.

D) firms lose because they incur menu costs.