1. Which of the following is not true? \"Unanticipated inflation ......\" -hurts
ID: 2806659 • Letter: 1
Question
1. Which of the following is not true? "Unanticipated inflation ......"
-hurts homeowners with a fixed rate mortgage
-hurts lenders
-benefits real asset holders
-hurts nominal asset holders
2. Suppose you sign a contract with your bank to borrow $50,000 for ten years at a fixed interest rate of 6%. If, over the years of the loan, the rate of inflation falls, the real interest rate on that loan will
- Go up
-Go down
-stay the same
-There is not enough information to determine the direction of the real interest rate in this case
3. If you hold your savings in the form of a nominal asset (other than cash), you are a:
- Speculator
-Borrower
-Lender
-Leveraged investor in real assets
4. Which of the following best describes what happens with nominal assets during inflation?
- The real value of a nominal asset will tend to rise during inflation, sometimes by a rate greater than inflation.
- The real value of a nominal asset will fall.
- The market value of a nominal asset will rise by an amount that is always precisely equal to the rate of inflation
- The real value of the nominal asset will remain the same during inflation.
Explanation / Answer
1. The unanticipated inflation would benefit real assets holders, as the re-sale value of an asset would have a positive impact due to inflation. Hemce, the buyer of an assets would be benefited form selling the asset at a higher price
2. Nominal Interest can be calculated as Real Interest + Inflation. If the inflation falls the real interest rate on that would Go Up.
3. For example nominal assets on the company's books are borrowings, and equity. The individaul who has deposited there savings in the company's books is the Lender
4. The real value of nominal assets will fall, as the real value is inflation adjusted. Hence, every increase in inflation rate would decline the real value of nominal assets. The correct answer is 2 (Real value of nominal asset will fall)
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