How much will a car, which currently sells for 30,000, cost in 10 years if the inflation rate is 5 per year, and car makers are able to increase prices with the inflation rate (rounded to nearest dollar).
a. 45,000
b. 45,500
c. 48,314
d. 38,403
e. 48,867
Question 2 - Which of the following statements about the foreign exchange market is not true?
a. The exchange rate setting depends on the exchange rate regime a nation chooses.
b. When a central bank intervenes in the foreign exchange market, it also affects the nation's monetary base.
c. The elasticities of an economy's supply and demand for foreign exchange determine the exchange rate volatility.
d. Flexible exchange rates increase the business risks associated with exchange rate movements.
e. Fixed exchange rates decrease the business risks associated with changes in a nation's money supply.
Question 3 - Governments are also affected by inflation. In which of the following ways is the government affected by inflation?
a. Expected inflation increases the real interest rate paid by the government on its new bond issues (i.e., deficit financing).
b. Inflation increases nominal income tax revenues received by the government.
c. Inflation automatically decreases government spending.
d. All of the above are true. In other words, the government is affected by each one of them.
Question 4 - The distinction between exogenous and endogenous variables is important because:
a. Endogenous variables are determined within the Three-Sector-Model while exogenous variables are not. Exogenous variables are therefore treated as shocks to the Three-Sector-Model.
b. Exogenous variables are fixed by definition.
c. Endogenous variables are fixed by definition.
d. Exogenous variables are determined within the Three-Sector-Model while endogenous variables are not. Endogenous variables are therefore treated as shocks to the three markets.
e. Endogenous variables are real factors while exogenous variables are nominal factors.
Question 5 - In general, expected inflation affects the nominal interest rate and nominal wage rate:
a. Quite differently because lenders and borrowers react to expected inflation in a very different manner from laborers and businesses.
b. In the same manner.
c. Quite differently because expected inflation does not affect labor contracts but it does affect interest rates.
d. Quite differently, because wages and salaries are heavily influenced by government rules and regulations but interest rates are determined in free and open markets.
e. None of the above.
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