Question

1. In early 2008, the central bank of Zimbabwe announced the inflation rate in that country had reached 24,000 percent, which of the following statements is NOT correct?

A. Zimbabwe prints too much money to compensate its huge government budget deficit.

B. Excessive money growth triggers this hyperinflation in Zimbabwe.

C. Zimbabwe may experience extreme low level of nominal interest rate and households are afraid to save in local banks, they prefer to change for US dollars.

D. If Zimbabwe borrowed money from loanable funds market, then it would raise the real interest rate in that market and “crowds out” private investors.

2. Which of the following statements is NOT correct?

A. If there is inflation, then a firm that has kept its price fixed for some time will have a low relative price.

B. Relative-price variability rises with inflation, leading to a misallocation of resources.

C. Higher inflation makes relative prices more variable, making it less likely that resources will be allocated to their best use.

D. Relative-price variability costs are costs incurred by people trying to protect themselves from the effects of inflation

3. When deciding how much to save, people care most about ______, and inflation will ______ people’s incentive to save.

            A. after-tax nominal interest rate, encourage

            B. after-tax real interest rates, discourage

            C. after-tax nominal interest rates, discourage

            D. after-tax real interest rates, encourage

Answer 1

1) Option (D) is the correct answer.

Because the inflation happened because of too much money supply, so first three options get eliminated. By getting loans from outside market, it cannot reduce the inflation as the interest rates will be high at that time for Zimbabwe.

2) Option (A) is not correct.

Because by having the fixed price, it does not necessarily help to have low relative prices during the inflation period. Considering the one which have high fixed price, automatically it will have higher relative price at the inflation times.

3) Option (D) is the correctanswer.

People do think about the after tax real interest rates so that their savings will help them to liv ebetter in the future. And the inflation factor encourages them to save.