Question 1

Who is hurt and who benefits from inflation? Why?

Accepted Answer

Inflation hurts those on fixed incomes a

Question 2

Suppose that last year you borrowed $100 at 5 percent interest to purchase a $100 pair of Nike cross-training shoes. This year you repaid the bank with interest. If the inflation rate was 10 percent last year, your purchase of the shoes would:

Accepted Answer

A) make you an inflation winner as you saved $5 on the shoes. 
B) make you an inflation loser as you paid $5 more than you should have for the shoes. 
C) not be affected at all by the inflation rate. 
D) be taxed according to COLA adjustments. 
E) make you an inflation loser because of bracket creep. 
A) make you an inflation winner as you saved $5 on the shoes. 
B) make you an inflation loser as you paid $5 more than you should have for the shoes. 
C) not be affected at all by the inflation rate. 
D) be taxed according to COLA adjustments. 
E) make you an inflation loser because of bracket creep.

Question 3

Suppose a market basket of goods and services costs $400 in the base year and the consumer price index (CPI)is currently 125. This indicates the price of the market basket of goods is now:

Accepted Answer

A) $275. 
B) $425. 
C) $500. 
D) $525. 
A) $275. 
B) $425. 
C) $500. 
D) $525.

Question 4

Exhibit 7-2 Consumer Price Index   As shown in Exhibit 7-2, the rate of inflation for Year 5 is:

Accepted Answer

A) 5 percent 
B) 10 percent. 
C) 20 percent. 
D) 25 percent. 
A) 5 percent 
B) 10 percent. 
C) 20 percent. 
D) 25 percent.

Question 5

The real interest rate is the annual percentage amount of money that is earned on a sum loaned or deposited in a bank.

Accepted Answer

A) True 
 B)False

Question 6

Cost-push inflation is caused by too much money chasing too few goods.

Accepted Answer

A) True 
 B)False

Question 7

Demand-pull inflation is typically caused by rapidly rising costs of production.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following is correct?

Accepted Answer

A) People whose nominal incomes rise faster than the rate of inflation gain purchasing power. 
B) Real income equals nominal income divided by the CPI as a decimal. 
C) The percentage change in real income equals the percentage change in nominal income minus the percentage change in CPI. 
D) All of these. 
A) People whose nominal incomes rise faster than the rate of inflation gain purchasing power. 
B) Real income equals nominal income divided by the CPI as a decimal. 
C) The percentage change in real income equals the percentage change in nominal income minus the percentage change in CPI. 
D) All of these.

Question 9

Deflation:

Accepted Answer

A) was prevalent during the oil shocks of the 1970s. 
B) will cause consumers' purchasing power to shrink. 
C) has been persistent in the U.S. economy since the Great Depression. 
D) none of these. 
A) was prevalent during the oil shocks of the 1970s. 
B) will cause consumers' purchasing power to shrink. 
C) has been persistent in the U.S. economy since the Great Depression. 
D) none of these.

Question 10

As the price of gasoline rose during the 1970s, consumers cut back on their use of gasoline relative to other consumer goods. This situation contributed 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

Cost-push inflation is due to:

Accepted Answer

A) labor cost increases. 
B) energy cost increases. 
C) raw material cost increases. 
D) all of these. 
A) labor cost increases. 
B) energy cost increases. 
C) raw material cost increases. 
D) all of these.

Question 12

A dramatic and sustained increase in oil prices would most likely:

Accepted Answer

A) increase demand-pull inflation. 
B) decrease demand-pull inflation. 
C) increase cost-push inflation. 
D) decrease cost-push inflation. 
A) increase demand-pull inflation. 
B) decrease demand-pull inflation. 
C) increase cost-push inflation. 
D) decrease cost-push inflation.

Question 13

Inflation is measured by an increase in:

Accepted Answer

A) homes, autos and basic resources. 
B) prices of all products in the economy. 
C) the consumer price index (CPI). 
D) none of these. 
A) homes, autos and basic resources. 
B) prices of all products in the economy. 
C) the consumer price index (CPI). 
D) none of these.

Question 14

Last year the Jones family earned $40,000. This year their income is $42,000. In an economy with an inflation rate of 10 percent, which of the following is correct?

Accepted Answer

A) The Jones' nominal income and real income have both fallen. 
B) The Jones' nominal income and real income have both risen. 
C) The Jones' nominal income has increased and their real income has fallen. 
D) The Jones' nominal income has decreased and their real income has risen. 
A) The Jones' nominal income and real income have both fallen. 
B) The Jones' nominal income and real income have both risen. 
C) The Jones' nominal income has increased and their real income has fallen. 
D) The Jones' nominal income has decreased and their real income has risen.

Question 15

Suppose that the consumer price index of a country was 160 at Year X and 168 at the end of Year Y. What was the country's inflation rate during Year Y?

Accepted Answer

A) 5 percent. 
B) 8 percent. 
C) 60 percent. 
D) 68 percent. 
A) 5 percent. 
B) 8 percent. 
C) 60 percent. 
D) 68 percent.

Question 16

Disinflation and deflation mean a decrease in the average price level.

Accepted Answer

A) True 
 B)False

Question 17

Suppose that the consumer price index (CPI)was 160 in Year X and 166 in Year Y, inflation during Year Y was approximately:

Accepted Answer

A) zero; prices were stable. 
B) 3.8 percent. 
C) 6 percent. 
D) 66 percent. 
A) zero; prices were stable. 
B) 3.8 percent. 
C) 6 percent. 
D) 66 percent.

Question 18

The likely result of an economy operating at full employment is:

Accepted Answer

A) cost-push inflation. 
B) demand-pull inflation. 
C) a lower rate of growth. 
D) hyperinflation. 
A) cost-push inflation. 
B) demand-pull inflation. 
C) a lower rate of growth. 
D) hyperinflation.

Question 19

Inflation reduces the purchasing power of nominal income and increases the purchasing power of fixed income.

Accepted Answer

A) True 
 B)False

Question 20

What are some criticisms of the CPI as a measure of inflation?

Accepted Answer

The CPI is criticized as a measure of in

Exam 7: Inflation

Who is hurt and who benefits from inflation? Why?

Suppose that last year you borrowed $100 at 5 percent interest to purchase a $100 pair of Nike cross-training shoes. This year you repaid the bank with interest. If the inflation rate was 10 percent last year, your purchase of the shoes would:

Suppose a market basket of goods and services costs $400 in the base year and the consumer price index (CPI)is currently 125. This indicates the price of the market basket of goods is now:

Exhibit 7-2 Consumer Price Index As shown in Exhibit 7-2, the rate of inflation for Year 5 is:

The real interest rate is the annual percentage amount of money that is earned on a sum loaned or deposited in a bank.

Cost-push inflation is caused by too much money chasing too few goods.

Demand-pull inflation is typically caused by rapidly rising costs of production.

Which of the following is correct?

Deflation:

As the price of gasoline rose during the 1970s, consumers cut back on their use of gasoline relative to other consumer goods. This situation contributed to which bias in the consumer price index?

Cost-push inflation is due to:

A dramatic and sustained increase in oil prices would most likely:

Inflation is measured by an increase in:

Last year the Jones family earned $40,000. This year their income is $42,000. In an economy with an inflation rate of 10 percent, which of the following is correct?

Suppose that the consumer price index of a country was 160 at Year X and 168 at the end of Year Y. What was the country's inflation rate during Year Y?

Disinflation and deflation mean a decrease in the average price level.

Suppose that the consumer price index (CPI)was 160 in Year X and 166 in Year Y, inflation during Year Y was approximately:

The likely result of an economy operating at full employment is:

Inflation reduces the purchasing power of nominal income and increases the purchasing power of fixed income.

What are some criticisms of the CPI as a measure of inflation?

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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