For Inflation to Have No Real Effect on the Economy,leaving

question 114

Multiple Choice

For inflation to have no real effect on the economy,leaving all decisions and their real outcomes unchanged,five conditions must be met.Which of the following incorrectly states one of those conditions?

• A)Inflation is universally and accurately anticipated.
• B)All savings earn the nominal interest rate,while money earns zero interest.
• C)Inflation of P₀ percent raises the nominal interest rate by P₀ above the no-inflation nominal rate.
• D)Only real interest income is taxable and only the real cost of borrowing is tax-deductible.
• E)Inflation raises the prices of all goods by the same percentage.

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Definitions:

Equilibrium Quantity

At the market equilibrium price, the amount of goods or services available matches the amount that is demanded.

Inferior Good

An economic term for a good whose demand decreases as the consumer's income increases, contrasting with normal goods.

Equilibrium Quantity

The quantity of goods or services supplied that is equal to the quantity demanded at the market price.

Normal Good

A normal good is a type of good for which demand increases as the income of individuals increases.