Which measure of expected inflation is the best choice, when calculating the real interest rate for the stated purpose?

Higher interest rates have which effects on consumers’ savings behavior?

Question 1 options:

	Consumers save more in the form of creating new capital (e.g. buying new cars, building new houses).
	Consumers save more in the form of buying bonds and paper assets.
	Consumers save more overall.

Question 2 (1 point)

 

Three standard measures of inflation are the “consumer price index,” the GDP deflator, and the CPE deflator. Please match each statement to the appropriate inflation index.

Question 2 options:

This measure is calculated regionally as well as nationally, making it possible to compare inflation rates in different cities. This measure places substantial weight on resources and intermediate goods used only by firms (not consumers). The Federal Reserve focuses on this measure for the purpose of making monetary policy. This measure is used to calculate automatic increases in social security benefits. Most economists believe that this measure provides the most accurate overall measure of price changes across the entire economy. This measure typically produces the highest estimate of the inflation rate.

1. Consumer Price Index 2. GDP deflator 3. PCE deflator

Question 3 (1 point)

 

The Fed’s current target rate of inflation is:

Question 3 options:

	0%
	1%
	2%
	3%
	4%
	5%

Question 4 (1 point)

 

Which measure of inflation is currently the highest?

Question 4 options:

	Personal Consumption Expenditure index
	Gross Domestic Product deflator
	Consumer Price Index

Question 5 (1 point)

 

Which of the following usually has the greatest effect on firms’ and consumers’ investment decisions?

Question 5 options:

	Inflation rate.
	Real interest rate.
	Nominal interest rate.

Question 6 (1 point)

 

Question 6 options:

If the nominal rate of interest is 3%, and the expected rate of inflation is 4%, then the real rate of interest is

 

%

Question 7 (1 point)

 

Based on current (our April 10 table) yields on U.S. Treasury debt (of all maturities), and the current inflation rate, real interest rates are currently in (roughly) what range?

Question 7 options:

	-3% to 0%
	0% to 3%
	3% to 6%
	6% to 9%

Question 8 (1 point)

 

When inflation rises, nominal interest rates tend to:

Question 8 options:

	Fall.
	Rise also.
	Neither; there is no predictable pattern.

Question 9 (1 point)

 

Which measure of expected inflation is the best choice, when calculating the real interest rate for the stated purpose?

Question 9 options:

The Congressional Budget Office is forecasting the future deficit in the Social Security trust fund. The Federal Reserve is making short run decisions about how to get the economy out of a recession. A firm is projecting the future payments on an adjustable rate mortgage. A firm is deciding whether to make a proposed capital investment.

1. Recent historical inflation. 2. The firm’s own projection of future inflation. 3. The Federal Reserve’s projection of future inflation. 4. The average projection of future inflation, among consumers, firms, and financial investors. 5. The real interest rate is irrelevant for this purpose, because what matters are nominal (not real) interest rates.

Question 10 (1 point)

 

The “market for loans” is a highly aggregated concept, which encompasses the markets for (mark all that apply):

Question 10 options:

	Insurance.
	Foreign exchange.
	Debt.
	Stocks.