Question 1

How is inflation typically measured? What are the different types of inflation? Why is it important to know which type of inflation we may be experiencing?

Accepted Answer

Inflation is typically measured by the CPI. The two types of inflation are demand-pull and cost-push. Demand-pull inflation is characterized by "too many dollars chasing too few goods and service." Demand-pull inflation is caused by total spending increasing faster than real GDP. Cost-push inflation is caused by anything that increases costs of production. Knowing which type of inflation we may be suffering from is important because each type of inflation requires a different policy prescription to combat.

Question 2

Suppose a market basket of goods and services costs $400 in the base year and $500 this year. The consumer price index (CPI)for this year is:

Accepted Answer

A) 25. 
B) 100. 
C) 125. 
D) 500. 
A) 25. 
B) 100. 
C) 125. 
D) 500. C

Question 3

The consumer price index (CPI):

Accepted Answer

A) adjusts for changes in product quality. 
B) includes separate market baskets of goods and services for both base and current years. 
C) includes only goods and services bought by typical urban consumer. 
D) uses current year quantities of goods and services. 
A) adjusts for changes in product quality. 
B) includes separate market baskets of goods and services for both base and current years. 
C) includes only goods and services bought by typical urban consumer. 
D) uses current year quantities of goods and services. C

Question 4

If the rate of inflation in a given time period turns out to be lower than lenders and borrowers anticipated, then the effect will be:

Accepted Answer

A) a redistribution of wealth from borrowers to lenders. 
B) a redistribution of wealth from lenders to borrowers. 
C) a net loss in purchasing power for lenders relative to borrowers. 
D) a net gain in purchasing power for borrowers relative to lenders. 
A) a redistribution of wealth from borrowers to lenders. 
B) a redistribution of wealth from lenders to borrowers. 
C) a net loss in purchasing power for lenders relative to borrowers. 
D) a net gain in purchasing power for borrowers relative to lenders.

Question 5

Those hurt by inflation include:

Accepted Answer

A) labor unions with COLA clauses. 
B) borrowers. 
C) savers. 
D) owners of real estate. 
E) owners of precious metals, antiques, and works of art. 
A) labor unions with COLA clauses. 
B) borrowers. 
C) savers. 
D) owners of real estate. 
E) owners of precious metals, antiques, and works of art.

Question 6

Last year the Olsen family earned $70,000. This year their income is $77,000. In an economy with an inflation rate of 8 percent, we can conclude that the Olsen's nominal income:

Accepted Answer

A) and real income both increased. 
B) and real income both decreased. 
C) increased, but their real income decreased. 
D) decreased, but their real income increased. 
A) and real income both increased. 
B) and real income both decreased. 
C) increased, but their real income decreased. 
D) decreased, but their real income increased.

Question 7

Suppose the consumer price index (CPI)for a given year is 150. This means the rate of inflation for the given year is 50 percent.

Accepted Answer

A) True 
 B)False

Question 8

In periods of high inflation,

Accepted Answer

A) people want to hold on to as much money as possible. 
B) the purchasing power of money is decreasing. 
C) nobody wants to work and earn income. 
D) low nominal interest rates are likely to result. 
E) nobody wants to buy goods and services. 
A) people want to hold on to as much money as possible. 
B) the purchasing power of money is decreasing. 
C) nobody wants to work and earn income. 
D) low nominal interest rates are likely to result. 
E) nobody wants to buy goods and services.

Question 9

Which of the following correctly defines inflation?

Accepted Answer

A) An increase in the price of a particular good or service. 
B) An increase in the general (average)price level of goods and services in the economy. 
C) The growth rate in real GDP. 
D) None of the above. 
A) An increase in the price of a particular good or service. 
B) An increase in the general (average)price level of goods and services in the economy. 
C) The growth rate in real GDP. 
D) None of the above.

Question 10

Suppose the price of banana rises over time and consumers respond by buying fewer bananas. This situation contributes to which bias in the consumer price index?

Accepted Answer

A) Substitution bias. 
B) Transportation bias. 
C) Quality bias. 
D) Indexing bias. 
A) Substitution bias. 
B) Transportation bias. 
C) Quality bias. 
D) Indexing bias.

Question 11

If the rate of inflation in a given time period turns out to be higher than lenders and borrowers anticipated, then the effect will be:

Accepted Answer

A) a redistribution of wealth from borrowers to lenders. 
B) a net gain in purchasing power for lenders relative to borrowers. 
C) no change in the distribution of wealth between lenders and borrowers. 
D) none of these. 
A) a redistribution of wealth from borrowers to lenders. 
B) a net gain in purchasing power for lenders relative to borrowers. 
C) no change in the distribution of wealth between lenders and borrowers. 
D) none of these.

Question 12

Union contracts with built-in cost-of-living adjustments and home mortgages that vary with the rate of inflation are:

Accepted Answer

A) inappropriate ways of combating inflation. 
B) examples of bracket creep. 
C) means of implementing fiscal policy. 
D) steps that can be taken to decrease the adverse impacts of inflation. 
E) examples of failed discarded policies of the 1970s. 
A) inappropriate ways of combating inflation. 
B) examples of bracket creep. 
C) means of implementing fiscal policy. 
D) steps that can be taken to decrease the adverse impacts of inflation. 
E) examples of failed discarded policies of the 1970s.

Question 13

One way the consumer price index (CPI)differs from the GDP chain price index is that the CPI:

Accepted Answer

A) uses current year quantities of goods and services. 
B) includes separate market baskets of goods and services for both base and current years. 
C) includes only goods and services bought by typical urban consumers. 
D) is bias free. 
A) uses current year quantities of goods and services. 
B) includes separate market baskets of goods and services for both base and current years. 
C) includes only goods and services bought by typical urban consumers. 
D) is bias free.

Question 14

One way the consumer price index (CPI)differs from the GDP chain price index is that it:

Accepted Answer

A) includes only purchases of items bought by typical urban consumers. 
B) uses only current year quantities. 
C) is based on all final goods and services. 
D) includes only services. 
A) includes only purchases of items bought by typical urban consumers. 
B) uses only current year quantities. 
C) is based on all final goods and services. 
D) includes only services.

Question 15

Suppose we shopped for a basket of goods in Year 1 and it cost $350. Suppose the same basket of goods adds up to $385 in Year 2. If we use Year 1 as a base year, what would be the Year 2 CPI?

Accepted Answer

A) 35. 
B) 90. 
C) 100. 
D) 110. 
E) 135. 
A) 35. 
B) 90. 
C) 100. 
D) 110. 
E) 135.

Question 16

Cost-push inflation is a result of an increase in the per unit costs of production.

Accepted Answer

A) True 
 B)False

Question 17

Inflation is defined as an increase in:

Accepted Answer

A) real wages of workers. 
B) real GDP. 
C) the average price level. 
D) all consumer products. 
A) real wages of workers. 
B) real GDP. 
C) the average price level. 
D) all consumer products.

Question 18

Inflation occurs when there is an increase in the purchasing power of money.

Accepted Answer

A) True 
 B)False

Question 19

Cost-push inflation is due to:

Accepted Answer

A) "too much money chasing too few goods". 
B) the economy operating at full employment. 
C) increases in production costs. 
D) all of these. 
A) "too much money chasing too few goods". 
B) the economy operating at full employment. 
C) increases in production costs. 
D) all of these.

Question 20

The nominal rate of interest is any rate of interest below 3 percent.

Accepted Answer

A) True 
 B)False

Exam 7: Inflation

How is inflation typically measured? What are the different types of inflation? Why is it important to know which type of inflation we may be experiencing?

Suppose a market basket of goods and services costs $400 in the base year and $500 this year. The consumer price index (CPI)for this year is:

The consumer price index (CPI):

If the rate of inflation in a given time period turns out to be lower than lenders and borrowers anticipated, then the effect will be:

Those hurt by inflation include:

Last year the Olsen family earned $70,000. This year their income is $77,000. In an economy with an inflation rate of 8 percent, we can conclude that the Olsen's nominal income:

Suppose the consumer price index (CPI)for a given year is 150. This means the rate of inflation for the given year is 50 percent.

In periods of high inflation,

Which of the following correctly defines inflation?

Suppose the price of banana rises over time and consumers respond by buying fewer bananas. This situation contributes to which bias in the consumer price index?

If the rate of inflation in a given time period turns out to be higher than lenders and borrowers anticipated, then the effect will be:

Union contracts with built-in cost-of-living adjustments and home mortgages that vary with the rate of inflation are:

One way the consumer price index (CPI)differs from the GDP chain price index is that the CPI:

One way the consumer price index (CPI)differs from the GDP chain price index is that it:

Suppose we shopped for a basket of goods in Year 1 and it cost $350. Suppose the same basket of goods adds up to $385 in Year 2. If we use Year 1 as a base year, what would be the Year 2 CPI?

Cost-push inflation is a result of an increase in the per unit costs of production.

Inflation is defined as an increase in:

Inflation occurs when there is an increase in the purchasing power of money.

Cost-push inflation is due to:

The nominal rate of interest is any rate of interest below 3 percent.

Introducing the Economic Way of Thinking

Production Possibilities, Opportunity Cost, and Economic Growth

Market Demand and Supply

Markets in Action

Gross Domestic Product

Business Cycles and Unemployment

The Keynesian Model

The Keynesian Model in Action

Aggregate Demand and Supply

Fiscal Policy

The Public Sector

Federal Deficits, Surpluses, and the National Debt

Money and the Federal Reserve System

Money Creation

Monetary Policy

The Phillips Curve and Expectations Theory

International Trade and Finance

Economies in Transition

Growth and the Less-Developed Countries

Applying Graphs to Economics

Consumer Surplus, Producer Surplus, and Market Efficiency

the Self-Correcting Aggregate Demand and Supply Model

Policy Disputes Using the Self-Correcting Aggregate Demand and Supply Model

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