Multiple Choice Questions:
1. Inflation will be least harmful if
a. Interest rates are not adjusted accordingly when inflation occurs.
b. Worker wages are set by long-term contracts.
c. It is correctly anticipated and interest rates adjust accordingly.
d. It is not fully anticipated.
2. Unexpected inflation generally benefits
a. Lenders.
b. Borrowers.
c. The poor.
d. People on fixed incomes.
3. The costs of inflation include
a. Menu costs.
b. Shoe-leather costs.
c. A distortion of price signals.
d. All of the above.
4. If the nominal interest rate is 9 percent and the inflation rate is 3 percent, the real interest rate is
a. 3 percent.
b. 6 percent.
c. 9 percent.
d. 12 percent.
e. 27 percent.
5. What is the real interest rate paid on a loan bearing 7 percent nominal interest per year if the inflation rate is 6 percent?
a. 13 percent
b. 7 percent
c. 6 percent
d. 1 percent
6. If people correctly anticipate inflation, it will
a. Benefit borrowers.
b. Benefit lenders.
c. Benefit neither borrowers nor lenders.
d. Harm both borrowers and lenders.
7. An increase in the expected future rate of inflation will lead to
a. An increase in the supply of funds.
b. A decrease in the supply of funds.
c. An increase in the demand for funds.
d. A decrease in the demand for funds.
e. Both b and d.
8. A business cycle reflects changes in economic activity, particularly real GDP. The stages of a business cycle in order are
a. Expansion, peak, contraction, and trough.
b. Expansion, trough, contraction, and peak.
c. Contraction, recession, expansion, and boom.
d. Trough, expansion, contraction, and peak.
9. In the contraction phase of the business cycle,
a. Output is rising.
b. Unemployment is falling.
c. Consumer and business confidence are high.
d. Investment is rising.
e. None of the above is true.
10. The contractionary phase of the business cycle is characterized by
a. Reduced output and increased unemployment.
b. Reduced output and reduced unemployment.
c. Increased output and increased unemployment.
d. Increased output and reduced unemployment.