Multiple Choice Questions
1. Inflation occurs when:
(a) Productivity increases
(b) The value of the currency decreases
(c) The value of the currency increases
(d) The price of gold decreases
2. “Then-current” (future) dollars can be converted into constant-value dollars by:
(a) Multiplying them by (1 + f) n
(b) Multiplying them by (1 + f) n /(1 + i) n
(c) Dividing them by (1 + f) n
(d) Dividing them by (1 + if) n
3. To calculate how much something will cost if you expect its cost to increase by exactly the inflation rate, you should:
(a) Multiply by (1 + f) n
(b) Multiply by [(1 + f) n / (1 + i) n]
(c) Divide by (1 + f) n
(d) Multiply by (1 + if) n
4. New state-mandated emission testing equipment for annual inspection of automobiles at Charlie’s Garage has a first cost of $30,000, an annual operating cost of $7000, and a $5000 salvage value after its 20-year life. For a real interest rate of 5% per year and an inflation rate of 4% per year, the annual capital recovery requirement for the equipment (in future dollars) is determined by:
(a) AW = – 30,000(A/P, 4%, 20) – 7000 + 5000(A/F, 4%, 20)
(b) AW = – 30,000(A/P, 5%, 20) – 7000 + 5000(A/F, 5%, 20)
(c) AW = – 30,000(A/P, 9%, 20) – 7000 + 5000(A/F, 9%, 20)
(d) AW = – 30,000(A/P, 9.2%, 20) – 7000 + 5000(A/F, 9.2%, 20)
5. Temporary price deflation may occur in specific sectors of the economy for all of the following reasons except:
(a) Improved technology
(b) Excessive demand
(c) Dumping
(d) Increased productivity