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Multiple Choice Quiz
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1
If inflation this year is lower than expected, then
A)lenders will gain at the expense of borrowers
B)borrowers will gain at the expense of lenders
C)the government will gain if it does not have an indexed tax system
D)wealth will be transferred from the poor to the rich
2
If wages were fully indexed, then
A)nominal wages would be periodically increased proportionally to the increase in prices over a given time period
B)there would never be an increase in inflation after a supply shock
C)the government would gain since inflation taxes away what workers may have gained from nominal wages increases
D)the economy would more easily adjust to full employment after a supply shock
3
When the inflation rate rises, this also rises
A)the real interest rate
B)the nominal interest rate
C)the Fed funds rate
D)unemployment
4
Which of the following is a cost of perfectly anticipated inflation?
A)shoe leather costs
B)menu costs
C)all of the above
D)none of the above
5
If you hold a fixed dollar asset, inflation will
A)increase the value of the asset
B)not affect the value of the asset
C)decrease the value of the asset
D)it is unclear what effect inflation will have
6
If tax brackets were not indexed to inflation, then a negative inflation rate would effectively
A)decrease taxes
B)increase taxes
C)decrease taxes only for the rich
D)none of the above
7
Suppose inflation is constant at 3% per year and you hold $100 in cash. How much will the $100 be worth at the end of 3 years?
A)$94.09
B)$91.00
C)$97.00
D)$91.27
8
Which of following can reduce people's vulnerability to inflation?
A)social security
B)indexation
C)unanticipated inflation
D)menu costs
9
Suppose you buy a home with a 25-year fixed interest rate mortgage. The mortgage rate is 6.9%. Meanwhile inflation averages 5.8% over the 25 years of the mortgage payments. How much is the real interest cost of the mortgage?
A)-1.1%
B)6.9%
C)1.1%
D)5.8%
10
The adjustable rate mortgage (ARM) is an example of
A)indexation
B)a floating rate loan
C)a long-term loan
D)all of the above





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