Which of the Following Is Not an Example of Inflation

question 7

Multiple Choice

Which of the following is not an example of inflation causing a redistribution of income because the inflation was unanticipated?

• A)A firm signs a 3-year contract with a union based on a 2 percent anticipated rate of inflation per year,and the actual rate of inflation ends up being 7 percent per year.
• B)A worker receives a raise in salary that is less than the rate of inflation,because management under-predicted inflation.
• C)Firms have to hire an extra worker to change prices in its store because of inflation.
• D)A bank collects a lower amount of interest from a loan because inflation was under-predicted.

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Definitions:

Repurchase Shares

A transaction in which a company buys back its own shares from the marketplace, reducing the amount of outstanding stock.

Return on Assets

A profitability ratio that measures how efficiently a company is using its assets to generate earnings.

Return on Debt

A measurement of a company's effectiveness in generating earnings from its debt, showing how well a company uses borrowed funds.

Cost of Equity

The return that investors expect for providing capital to a company, effectively the compensation for the risk of investing in the company.