ECON 1201 Lecture Notes - Lecture 17: Business Cycle, Great Moderation, Potential Output

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31 Jan 2019

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If the inflation rate turns out to be higher than expected, borrowers pay and lenders receive a lower real interest rate than either of them expected. It is possible for the nominal interest rate to be less than the real interest rate: deflation, a decline in the price level. A negative inflation rate and occurs on the rare occasions when the price level falls. Does inflation impose costs on the economy: nominal incomes generally increase with inflation. To avoid this cost, workers and firms will try to hold as little paper money as possible, but they will have to hold some: the cost to firms of changing prices are called menu costs. Increases in real gdp per capita depend on increases in labor productivity: labor productivity: the quantity of goods and services that can be produced by one worker or by one hour of work.

Related Questions

Suppose expected inflation was 2% and actual inflation was 4%. Then the ex post real interest rate was ---- than the ex ante real interest rate and there was a redistribution of wealth from ----.

a higher; borrowers to lenders

b higher; lenders to borrowers

c lower; borrowers to lenders

d lower; lenders to borrowers

Suppose that, in the short run, the price level is sticky (fixed) but nominal interest rates adjust to achieve equilibrium in the money market. According to the liquidity preference theory, if the central bank increases the money supply, then short-term nominal interest rates

a rise.

b fall.

c remain unchanged.

All else equal, if the ratio of reserves to deposits increases, the money supply

a increases

b decreases

c remains the same

Depreciation is tax-deductible but based on the historical cost of capital. If inflation is positive, then the corporate income tax ---- investment.

a encourages

b discourages

c has no effect on

If the price index for capital goods is the same as the price index for other goods, an index of the real cost of capital, in the absence of taxes, is the

a nominal interest rate plus the depreciation rate.

b real interest rate plus the depreciation rate.

c purchase price of a capital good multiplied by the sum of the nominal interest rate plus the depreciation rate.

d purchase price of a capital good multiplied by the sum of the real interest rate plus the depreciation rate.

QUESTION 11

If the demand for investment loans rises, this could be the result of

		the discovery of new and better roundabout methods of production.
		a lower rate of time preference in society.
		a lower interest rate.
		a higher interest rate.
		a and c

1 points

QUESTION 12

Which of the following statements is true?

		All persons have a high rate of time preference.
		People with a high rate of time preference are more likely to be borrowers than people with a low rate of time preference.
		People with a high rate of time preference are more likely to be lenders than people with a low rate of time preference.
		A high interest rate is the cause of a high rate of time preference.
		none of the above

1 points

QUESTION 13

Which of the following statements is true?

		The nominal interest rate is always higher than the real interest rate since the nominal interest rate equals the real interest rate plus the expected inflation rate.
		The nominal interest rate is always lower than the real interest rate since the nominal interest rate equals the real interest rate minus the expected inflation rate.
		The nominal interest rate can equal the real interest rate, but to do so the expected inflation rate must be zero percent.
		It is the nominal interest rate-not the real interest rate-that matters to borrowers.

1 points

QUESTION 14

If there is an increase in the expected inflation rate, then,

		the supply and demand for loanable funds will decrease.
		the supply and demand for loanable funds will increase.
		the supply of loanable funds will decrease, and the demand for loanable funds will increase.
		the supply of loanable funds will increase, and the demand for loanable funds will decrease.

1 points

QUESTION 15

If suddenly a 4 percent inflation rate (instead of a zero percent inflation rate) is expected by both suppliers and demanders in the loanable funds market, then

		the demand for loanable funds curve will shift rightward, and the supply of loanable funds curve will shift leftward.
		the demand for loanable funds curve will shift leftward, and the supply of loanable funds curve will shift rightward.
		both the demand for loanable funds curve and the supply of loanable funds curve will shift leftward.
		both the demand for loanable funds curve and the supply of loanable funds curve will shift rightward.

23.

Shoe-leather costs refer to the costs of:

	the raw material used in production.
	the increased number of transactions as inflation increases.
	living adjustments as inflation increases.
	the raw material used in production, the increased number of transactions as inflation increases, and living adjustments as inflation increases.

24.

Unit-of-account costs of inflation are the:

	costs associated with money being a less reliable unit of measurement.
	costs of transactions associated with avoiding the inflation tax.
	costs associated with businesses changing prices.
	transfers the government gets from printing money.

25.

Menu costs of inflation are the:

	costs associated with money being a less reliable unit of measurement.
	costs of transactions associated with avoiding the inflation tax.
	costs associated with businesses changing prices.
	revenue the government gets from printing money.

26.

Which statement is true?

	Unexpected inflation benefits lenders and hurts borrowers.
	Unexpected inflation benefits borrowers and hurts lenders.
	Unexpected inflation benefits borrowers but does not affect lenders.
	Unexpected deflation benefits lenders but does not affect borrowers.

27.

Suppose that the nominal rate of interest is 7 percent and the inflation rate is 3 percent. The real rate of interest is equal to:

	3 percent.
	4 percent.
	10 percent.
	7 percent.

28.

You have gone to the bank to borrow money for one year. The nominal annual interest rate is 7.5 percent. The real rate of interest is 4 percent. (Hint: what is the expected inflation rate?) Over the course of the year, overall prices increased by 3 percent. (Hint: What is the actual inflation rate?) This rate of inflation hurt the _____ because the actual rate of inflation was _____ than the anticipated rate of inflation.

	lender, higher
	lender, lower
	borrower, higher
	borrower, lower

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ECON 1201 Lecture Notes - Lecture 17: Business Cycle, Great Moderation, Potential Output

ECON 1201 Full Course Notes

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