97. In Econoland in 2005, people with incomes between $20,000 and $30,000 paid 12% of their income in taxes
and people with incomes between $30,001 and $40,000 paid 15%. In 2005, the CPI in Econoland equaled 1.20, and it increased to 1.26 in 2006. If the government of Econoland wants to keep households with a given real income from being pushed up into a higher tax bracket by inflation, the $20,000-to-$30,000 bracket will be changed in 2006to:
A. $15,873-to-$23,810
B. $21,000-to-$31,500
C. $24,000-to-$37,800
D. $25,200-to-$37,800
98. The shoe leather costs of inflation include all of the following except:
A. the lost purchasing power of cash.
B. the extra costs incurred to avoid holding cash.
C. the cost of more frequent trips to the bank.
D. the installation of a new cash management system.
99. The extra costs incurred to avoid holding cash when there is inflation are called the:
A. average costs of inflation.
B. consumer price index costs.
C. external costs.
D. shoe leather costs.
100. Making more frequent, but smaller cash withdrawals from banks ______ the inflation losses from holding cash
and ______ the shoe leather costs of inflation.
A. increases; increases
B. increases; reduces
C. reduces; has no impact on
D. reduces; increases
101. Shoe leather costs include the ______ due to the more frequent trips to the bank, the new cash management
systems and the expanded employment in banks that inflation causes.
A. bracket creep and redistribution that occur
B. deflating and indexing that are necessary
C. substitution and price adjustment biases that arise
D. time and effort that are used up
102. As the rate of inflation increases, the increased cost to a consumer of more frequent trips to the bank to make
cash withdrawals represents an increase in the:
A. shoe leather costs of inflation.
B. erosion of the purchasing power of cash.
C. tax distortion generated by inflation.
D. \noise\
103. If workers and employers agree to a three-year wage contract under the expectation of 3% inflation, and
inflation turns out to be 5%, then:
A. workers gain and employers gain.
B. workers gain and employers lose.
C. workers lose and employers gain.
D. workers lose and employers lose.
104. Suppose workers and employers agree to a three-year wage contract under the expectation of 3% inflation, but
inflation turns out to be 1%. In this case, ______ lost purchasing power, and ______ gained purchasing power.
A. employers; workers
B. no one; employers
C. workers; employers
D. employers; no one
105. If a borrower and lender agree to an interest rate on a loan when inflation is expected to be 7% and inflation
turns out to be 10% over the life of the loan, then the borrower ______ and the lender ______.
A. gains; gains
B. gains; loses
C. is not affected; gains
D. loses; gains
106. Suppose a borrower and lender agree to an interest rate on a loan when inflation is expected to be 6%. The
borrower would benefit the most if which of the following inflation rates actually occurred? A. 0% B. 3% C. 6% D. 9%
107. When inflation turns out to be different from what was expected, purchasingpower is ______.
A. destroyed
B. redistributed
C. increased
D. decreased
108. It is difficult to engage in long-term financial planning when inflation is:
A. high and erratic.
B. low and stable.
C. accounted for through indexing.
D. predictable.
109. The real costs of inflation to society include:
A. an increase in the general level of prices.
B. lost purchasing power of income.
C. higher relative prices.
D. interference with long-term planning.
110. The \
A. higher relative prices.
B. lower relative prices.
C. reduced economic growth and efficiency.
D. a higher overall price level.
111. The \except:
A. shoe-leather costs.
B. higher relative prices.
C. noise in the price system.
D. unexpected redistribution of wealth.
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