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:

Variation

The measure of the spread or dispersion of a set of data points or values in a dataset.

Random Variable

A variable whose possible values are numerical outcomes of a random phenomenon.

Stock Investment

The purchase of shares in a company with the expectation of earning dividends or selling the shares at a higher price in the future.

Variability Of Return

Denotes the volatility in the profits or gains from investments over a period.