Question 1

If the nominal interest rate is 5 percent and there is no inflation, then the real interest rate:

Accepted Answer

A) exceeds 5 percent. 
B) is less than 5 percent. 
C) is 5 percent. 
D) is zero. 
A) exceeds 5 percent. 
B) is less than 5 percent. 
C) is 5 percent. 
D) is zero.

Question 2

The consumer price index (CPI)is a number that measures movements in the average (general)level of prices.

Accepted Answer

A) True 
 B)False

Question 3

Demand-pull inflation occurs during a period of time in which total spending is increasing less than total output (GDP)is increasing.

Accepted Answer

A) True 
 B)False

Question 4

Real income for a given year would be less than nominal income in that year if:

Accepted Answer

A) the consumer price index was less than 100 in that year. 
B) nominal income in that year was greater than nominal income in the previous year. 
C) nominal income in that year was less than nominal income in the previous year. 
D) the consumer price index was greater than 100 in that year. 
A) the consumer price index was less than 100 in that year. 
B) nominal income in that year was greater than nominal income in the previous year. 
C) nominal income in that year was less than nominal income in the previous year. 
D) the consumer price index was greater than 100 in that year.

Question 5

Demand-pull inflation occurs:

Accepted Answer

A) at or close to full employment. 
B) because of excess total spending. 
C) when "too much money is chasing too few goods." 
D) all of these. 
A) at or close to full employment. 
B) because of excess total spending. 
C) when "too much money is chasing too few goods." 
D) all of these.

Question 6

Consider borrowers and lenders who agree to loans with fixed nominal interest rates. If inflation is higher than what the borrowers and lenders expected, then who benefits from lower real interest rates?

Accepted Answer

A) Only the borrowers benefit. 
B) Only the lenders benefit. 
C) Both borrowers and lenders benefit. 
D) Neither borrowers nor lenders. 
A) Only the borrowers benefit. 
B) Only the lenders benefit. 
C) Both borrowers and lenders benefit. 
D) Neither borrowers nor lenders.

Question 7

Demand-pull inflation is most pronounced during a recession (as opposed to the recovery phase of the business cycle).

Accepted Answer

A) True 
 B)False

Question 8

Demand-pull inflation is due to:

Accepted Answer

A) minimum wage laws. 
B) labor cost increases. 
C) excess total spending. 
D) tax increase. 
A) minimum wage laws. 
B) labor cost increases. 
C) excess total spending. 
D) tax increase.

Question 9

Assume that the real rate of interest is 5 percent and a lender charges a nominal interest rate of 15 percent. If a borrower expects that the rate of inflation next year will be 10 percent and the actual rate of inflation next year is 12 percent:

Accepted Answer

A) neither the borrower nor the lender benefits from inflation. 
B) both the borrower and the lender lose from inflation. 
C) the borrower benefits from inflation, while the lender loses from inflation. 
D) the lender benefits from inflation, while the borrower loses from inflation. 
A) neither the borrower nor the lender benefits from inflation. 
B) both the borrower and the lender lose from inflation. 
C) the borrower benefits from inflation, while the lender loses from inflation. 
D) the lender benefits from inflation, while the borrower loses from inflation.

Question 10

Which of the following correctly describes a wage-price spiral?

Accepted Answer

A) An increase in nominal wages causes inflation, and inflation causes workers to demand even higher wages in order to keep their real income constant. This cycle can repeat itself. 
B) An increase in real wages due to growth in worker productivity causes inflation, which in turn increases worker productivity. 
C) A decrease in prices causes workers to demand higher wages, which in turn puts additional downward pressure on prices. 
D) None of the above. 
A) An increase in nominal wages causes inflation, and inflation causes workers to demand even higher wages in order to keep their real income constant. This cycle can repeat itself. 
B) An increase in real wages due to growth in worker productivity causes inflation, which in turn increases worker productivity. 
C) A decrease in prices causes workers to demand higher wages, which in turn puts additional downward pressure on prices. 
D) None of the above.

Question 11

Suppose that your income during Year X was $50,000, and the CPI for Year X was 150 (base year = Z. Back in Year Z your income was $30,000. Has your real income increased or decreased from Z to year X? By how much?

Accepted Answer

A) Increased by $5,000. 
B) Increased by $3,333.33. 
C) Unchanged. 
D) Decreased by $3,333.33. 
E) Decreased by $5,000. 
A) Increased by $5,000. 
B) Increased by $3,333.33. 
C) Unchanged. 
D) Decreased by $3,333.33. 
E) Decreased by $5,000.

Question 12

Demand-pull inflation is associated with:

Accepted Answer

A) decreasing total spending (demand). 
B) increasing total spending (demand). 
C) decreasing costs of production (supply). 
D) increasing costs of production (supply). 
A) decreasing total spending (demand). 
B) increasing total spending (demand). 
C) decreasing costs of production (supply). 
D) increasing costs of production (supply).

Question 13

In which of the following years was inflation in the United States the highest?

Accepted Answer

A) 1960. 
B) 1970. 
C) 1980. 
D) 1990. 
E) 2007. 
A) 1960. 
B) 1970. 
C) 1980. 
D) 1990. 
E) 2007.

Question 14

A sustained decrease in the price level is known as deflation.

Accepted Answer

A) True 
 B)False

Question 15

Losers from inflation include:

Accepted Answer

A) savers and borrowers. 
B) landlords and the government. 
C) borrowers and the government. 
D) those on a fixed income and borrowers. 
E) those on a fixed income and savers. 
A) savers and borrowers. 
B) landlords and the government. 
C) borrowers and the government. 
D) those on a fixed income and borrowers. 
E) those on a fixed income and savers.

Question 16

The CPI (using a 2000 base year)for 1965 is 26.0. Suppose a household's annual take-home pay in 1965 was $8,320. What would be an equivalent home pay in 2000?

Accepted Answer

A) $10,483. 
B) $21,632. 
C) $23,680. 
D) $32,000. 
A) $10,483. 
B) $21,632. 
C) $23,680. 
D) $32,000.

Question 17

The best definition of inflation is a(n):

Accepted Answer

A) temporary increase in prices. 
B) increase in the price of one important commodity such as food. 
C) persistent increase in the general level of prices as measured by a price index. 
D) increase in the purchasing power of the dollar. 
A) temporary increase in prices. 
B) increase in the price of one important commodity such as food. 
C) persistent increase in the general level of prices as measured by a price index. 
D) increase in the purchasing power of the dollar.

Question 18

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) no change in the distribution of wealth between lenders and borrowers. 
B) a net gain in purchasing power for lenders relative to borrowers. 
C) a redistribution of wealth from borrowers to lenders. 
D) a redistribution of wealth from lenders to borrowers. 
A) no change in the distribution of wealth between lenders and borrowers. 
B) a net gain in purchasing power for lenders relative to borrowers. 
C) a redistribution of wealth from borrowers to lenders. 
D) a redistribution of wealth from lenders to borrowers.

Question 19

Inflation is an increase in:

Accepted Answer

A) prices of all products in the economy. 
B) homes, autos and basic resources. 
C) the general price level of products. 
D) none of these. 
A) prices of all products in the economy. 
B) homes, autos and basic resources. 
C) the general price level of products. 
D) none of these.

Question 20

Unlike the GDP deflator, the CPI does not consider goods and services purchased by business and government.

Accepted Answer

A) True 
 B)False

Exam 7: Inflation

If the nominal interest rate is 5 percent and there is no inflation, then the real interest rate:

The consumer price index (CPI)is a number that measures movements in the average (general)level of prices.

Demand-pull inflation occurs during a period of time in which total spending is increasing less than total output (GDP)is increasing.

Real income for a given year would be less than nominal income in that year if:

Demand-pull inflation occurs:

Consider borrowers and lenders who agree to loans with fixed nominal interest rates. If inflation is higher than what the borrowers and lenders expected, then who benefits from lower real interest rates?

Demand-pull inflation is most pronounced during a recession (as opposed to the recovery phase of the business cycle).

Demand-pull inflation is due to:

Assume that the real rate of interest is 5 percent and a lender charges a nominal interest rate of 15 percent. If a borrower expects that the rate of inflation next year will be 10 percent and the actual rate of inflation next year is 12 percent:

Which of the following correctly describes a wage-price spiral?

Suppose that your income during Year X was $50,000, and the CPI for Year X was 150 (base year = Z. Back in Year Z your income was $30,000. Has your real income increased or decreased from Z to year X? By how much?

Demand-pull inflation is associated with:

In which of the following years was inflation in the United States the highest?

A sustained decrease in the price level is known as deflation.

Losers from inflation include:

The CPI (using a 2000 base year)for 1965 is 26.0. Suppose a household's annual take-home pay in 1965 was $8,320. What would be an equivalent home pay in 2000?

The best definition of inflation is a(n):

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:

Inflation is an increase in:

Unlike the GDP deflator, the CPI does not consider goods and services purchased by business and government.

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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