a. If people always perfectly anticipated and adjusted to the inflation rate, then

• real interest rates would be zero
• there would be no menu costs
• they would still have to worry about shoe-leather costs
• the costs of inflation to society would be zero
• there will be no tax distortion

b. People should be concerned about imperfectly anticipated inflation since

• it results in a redistribution of wealth
• debtors tend to profit while creditors tend to lose
• equity holders experience a loss in the real value of fixed dividends
• they may move into higher tax brackets as nominal wages are adjusted for inflation
• all of these are concerns of imperfectly anticipated inflation

c. The real return on a ten-year Treasury bond was highest in the period from

• 2010-19
• 1970-79
• 1980-89
• 1990-99
• 2000-09

d. Which of the following statements is FALSE?

• homeowners with fixed-rate mortgages benefit from unanticipated high inflation
• the costs of unanticipated inflation can be ignored, since the gains and losses of induced wealth transfers tend to cancel each other out over the economy as a whole
• Social Security beneficiaries are better protected against unanticipated inflation than workers with long-term contracts
• workers who received the minimum wage greatly suffered from unanticipated inflation

e. Economists tend to agree that

• the best inflation target is a zero percent inflation rate
• the best inflation target is a two percent inflation rate
• policy makers should never set inflation targets
• any inflation target is fine, as long as policy makers announce it in advance
• some inflation may be beneficial to the economy, therefore central banks may set a low inflation target

f. The concern over inflation

• is not justified since gains and losses from real wealth transfers cancel out over time for the economy as a whole
• is irrational since high inflation generally means high growth
• is attributable primarily to increased transfers arising from cost-of-living adjustments
• stems from the fact that inflation is rarely predictable and those households who hold fixed dollar assets will experience a loss in wealth
• is only relevant in case of high or rising inflation

g. Which of the following is FALSE, if inflation could be always perfectly anticipated?

• no costs to society arise from inflation
• there are no shoe-leather costs
• there are no menu costs
• currency holders would not experience any loss of purchasing power
• there are no tax distortions

h. If this year's inflation rate was lower than expected, then

• a transfer of wealth from the poor to the rich would occur
• the government would gain tax revenues unless it had an indexed tax system
• lenders would gain at the expense of borrowers
• borrowers would gain at the expense of lenders
• nominal wage rates would increase

i. The redistribution effect that arises from an unanticipated increase in inflation will affect

• insurance contracts
• cash holdings
• people who own fixed rate bonds
• all of these are affected by unanticipated increase in inflation
• pensioners

j. If wages and prices were fully indexed,

• there would be less inflation following an adverse supply shock
• inflation could always be perfectly anticipated
• inflation arising from money expansion could be prevented
• the economy would have difficulty adjusting to supply shocks since real wages could not adjust easily
• politicians would be more likely to fight inflation vigorously