For Inflation to Have No Real Effect on the Economy

question 38

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:

Frictional Unemployment

Short-term unemployment occurring when individuals are between jobs or are seeking their first jobs.

Prosperity Phase

A period in the business cycle characterized by economic growth, high employment, and rising incomes.

Three-Phase Cycle

A conceptual model describing the three stages of economic cycles: expansion, peak, and recession.

OPEC

The Organization of the Petroleum Exporting Countries, an intergovernmental organization of oil-exporting countries that coordinates and unifies petroleum policies among Member Countries.