2.1 The Principle of Opportunity Cost

| February 14, 2018

9)
Suppose your bank pays you 4% interest per year on your savings account, so
that $1,000 grows to $1,040 over a one-year period. If prices increase by 1%
per year over that time, approximately how much real value do you gain by
keeping $100 in the bank for a year?
A)
$0
B)
$10
C)
$30
D)
$50

10)
Suppose your bank pays you 5% interest per year on your savings account. If
prices increase by 5% per year over that time, approximately how much real
value do you gain by keeping $100 in the bank for a year?
A)
$0
B)
$1
C)
$3
D)
$6

11)
Suppose that you lend $1,000 to a friend and he or she pays you back one year
later. What is the opportunity cost of lending the money?
A)
There is no cost.
B)
The real interest rate that would have been earned on the money.
C)
The nominal interest rate that would have been earned on the money.
D)
The implicit cost of the money.

12)
You borrow money to buy a house in 2009 at a fixed interest rate of 5.5%. By
2012, the inflation rate has steadily fallen to 1.5% from the recent high of
3.0% in 2009. Considering only your mortgage, is inflation good news or
bad news for you?
A)
bad news, because inflation hurts everyone
B)
bad news, because it makes the real value of your mortgage payments increase
C)
good news, because it makes the real value of your mortgage payments decrease
D)
bad news, because it makes the nominal value of your mortgage payments increase

13)
What is the nominal value of money?
A)
what can be purchased with the money
B)
discounts taken by multiple purchases
C)
savings by shopping on specific days of the week
D)
its actual face value

14)
What is the real value of money?
A)
its face value
B)
its compounded earnings in banks
C)
the quantity of goods it can buy
D)
the ability of shop at market prices

1974

2011

Minimum
wage per hour

$ 2.00

$ 7.25

Weekly
income from minimum wage

$80.00

$290.00

Cost
of a standard basket of goods

$47.00

$225.00

Number
of baskets per week

1.70

1.29

Table
2.5

15)
Comparing the minimum wages between 1974 and 2011 addresses the economic concept
of
A)
the marginal principle.
B)
the principle of voluntary exchange.
C)
the principle of diminishing returns.
D)
the real-nominal principle.

16)
Refer to the table above. Thenominal value of the minimum wage in 2011
was
A)
$2.00 per hour.
B)
$3.63 per hour.
C)
$5.62 per hour.
D)
$7.25 per hour.

17)
Refer to the table above. What happened to the real value of the minimum wage
between 1974 and 2011?
A)
It remained the same.
B)
It increased.
C)
It decreased.
D)
It could not be determined from the given information.

18)
Refer to the table above. By what percentage did the federal minimum wage
increase from 1974 to 2011?
A)
72.41%
B)
262.5%
C)
362.5%
D)
525.0%

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