Initially the nominal interest rate is 8 percent and the inflation rate is 6 percent. One year later, the nominal interest rate rises to 12 percent while the inflation rate rises to 10 percent. It follows that the real rate of interest:
Answer(s): A
Choice "a" is correct. The real interest rate equals the nominal interest rate minus the inflation rate. Thus, the real interest rate in the first year is: real interest rate = 8 - 6 = 2 and the real interest rate in the next year is: real interest rate = 12 - 10 = 2.
If consumption is $70b, investment $50b, government spending $20b, exports $7b, and imports $5b, what is GDP?
Answer(s): D
Choice "d" is correct. By the expenditure approach to measuring GDP, GDP equals: Consumption + Investment + Government Spending + Exports - Imports. Thus, GDP = 70 + 50 + 20 + 7 - 5 = 142b.
When a worker quits work to stay at home with the children, it is an example of:
Choice "d" is correct. Unemployment only tallies workers actively seeking employment; it does not count retirees or stay-at-home parents.Choice "a" is incorrect. Frictional unemployment describes workers who leave work voluntarily to seek a better position.Choice "b" is incorrect. Structural unemployment describes workers whose skills are no longer needed.Choice "c" is incorrect. Cyclical unemployment describes workers unemployed due to the business cycle.
The CPI jumps from 131 in year 1 to 136.5 in year 2. What is annual inflation rate?
Choice "a" is correct. The inflation rate is measured as:
The inflation rate measures:
Choice "d" is correct. The inflation rate measures the rate of increase in the overall price level in the economy.Choice "a" is incorrect. The inflation rate is associated with price level changes not changes in the nominal value of output.Choice "b" is incorrect. Inflation refers to a sustained increase in the overall price level. Not the price of a particular good.Choice "c" is incorrect. The inflation rate is associated with price level changes not interest rate changes.
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