1) Bertha took out a 5-year fixed-interest-rate loan. She has anticipated the inflation rate of 2%...
1) Bertha took out a 5-year fixed-interest-rate loan. She has anticipated the inflation rate of 2% but it actually turned to be 4%.
A. Her real interest rate was higher than expected, and the real value of the loan is higher than expected.
B. Her real interest rate was higher than expected, and the real value of the loan is lower than expected.
C. Her real interest rate was lower than expected, and the real value of the loan is lower than expected.
D. Her real interest rate was lower than expected, and the real value of the loan is higher than expected.
2) Which of the following describes the effect of a decrease in the money supply?
A. The money supply curve shifts to the left, the price level decreases causing the value of money to increase.
B. The money supply curve shifts to the right, the price level increases causing the value of money to decrease.
C. The money supply curve shifts to the right, the price level decreases causing the value of money to increase.
D. The money supply curve shifts to the left, the price level increases causing the value of money to decrease.
3)There are no costs of inflation.
True/False
4)When inflation was expected to be high and it turns out to be low, wealth is redistributed from debtors to creditors.
Truth/False
5) Which of the following explains why the demand curve for money is downward sloping?
A. People want to hold a larger quantity of money when each dollar buys less.
B. The quantity of money supplied is fixed by the Federal Reserve.
C. The quantity of money supplied is fixed by the consumer demand.
D. People want to hold a larger quantity of money when each dollar buys more.
Homework Answers
(1) (C)
Since real rate = Nominal rate - Inflation rate,
An increase in inflation rate will decrease the real interest rate, and real value of the loan will decrease.
(2) (A)
Lower money supply shifts money supply curve to left, increasing interest rate. Higher interest rate decreases investment, which lowers aggregate demand, shifting AD curve to left. Price level decreases, causing value of money to increase to due an increase in purchasing power.
(3) False
(4) True
A less-than-anticipated inflation rate causes real value of a loan to increase above the expected real value of loan, which hurts debtors and benefits creditors.
(5) (A)
When each dollar buys less, purchasing power falls, and people need more money to buy the same amount of goods and services.
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