Question 1

When OPEC raised the price of oil, it created a:

Accepted Answer

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

Question 2

When the inflation rate rises, the purchasing power of nominal income:

Accepted Answer

A)  remains unchanged. 
B)  decreases. 
C)  increases. 
D)  changes by the inflation rate minus one. 
A)  remains unchanged. 
B)  decreases. 
C)  increases. 
D)  changes by the inflation rate minus one. B

Question 3

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. B

Question 4

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)  excess total spending. 
A)  "too much money chasing too few goods". 
B)  the economy operating at full employment. 
C)  increases in production costs. 
D)  excess total spending.

Question 5

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 6

Which of the following is the largest single component of the market basket used to compute the consumer price index (CPI)?

Accepted Answer

A)  food and beverages 
B)  housing 
C)  transportation 
D)  medical care 
A)  food and beverages 
B)  housing 
C)  transportation 
D)  medical care

Question 7

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 8

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 9

As inflation drives up prices, people attempt to find substitutes and adjust what they buy. The resulting substitution bias problem causes the CPI to:

Accepted Answer

A)  overstate the impact of higher prices on consumers. 
B)  consistently underestimate the true inflation rate. 
C)  omit the benefits of product quality improvements. 
D)  have larger fluctuations than other price indexes. 
A)  overstate the impact of higher prices on consumers. 
B)  consistently underestimate the true inflation rate. 
C)  omit the benefits of product quality improvements. 
D)  have larger fluctuations than other price indexes.

Question 10

Cost-push 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)  when there are increases in production costs. 
A)  at or close to full employment. 
B)  because of excess total spending. 
C)  when "too much money is chasing too few goods." 
D)  when there are increases in production costs.

Question 11

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 12

Suppose you place $10,000 in a retirement fund that earns a nominal interest rate of 8 percent. If you expect inflation to be 5 percent or lower, then you are expecting to earn a real interest rate of at least:

Accepted Answer

A)  1.6 percent. 
B)  3 percent. 
C)  4 percent. 
D)  5 percent. 
A)  1.6 percent. 
B)  3 percent. 
C)  4 percent. 
D)  5 percent.

Question 13

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 take-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 14

The real interest rate is defined as the:

Accepted Answer

A)  actual interest rate. 
B)  fixed-rate on consumer loans. 
C)  nominal interest rate minus the inflation rate. 
D)  expected interest rate minus the inflation rate. 
A)  actual interest rate. 
B)  fixed-rate on consumer loans. 
C)  nominal interest rate minus the inflation rate. 
D)  expected interest rate minus the inflation rate.

Question 15

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. 
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.

Question 16

Suppose you received a 5 percent increase in your nominal wage. Over the year, inflation ran about 2 percent. Which of the following is true ?

Accepted Answer

A)  Your real wage increased. 
B)  Your nominal wage decreased. 
C)  Both your nominal and real wages decreased. 
D)  Although your nominal wage rose, your real wage decreased. 
A)  Your real wage increased. 
B)  Your nominal wage decreased. 
C)  Both your nominal and real wages decreased. 
D)  Although your nominal wage rose, your real wage decreased.

Question 17

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 18

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

Accepted Answer

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

Question 19

Which of the following is not a cause of cost-push inflation?

Accepted Answer

A)  labor cost increases. 
B)  energy cost increases. 
C)  raw material cost increases. 
D)  consumer incomes increase. 
A)  labor cost increases. 
B)  energy cost increases. 
C)  raw material cost increases. 
D)  consumer incomes increase.

Question 20

Exhibit 7-1 Consumer Price Index
 
As shown in Exhibit 7-1, the rate of inflation for Year 2 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.

Exam 17: Inflation

When OPEC raised the price of oil, it created a:

When the inflation rate rises, the purchasing power of nominal income:

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

Cost-push inflation is due to:

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

Which of the following is the largest single component of the market basket used to compute the consumer price index (CPI)?

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:

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

As inflation drives up prices, people attempt to find substitutes and adjust what they buy. The resulting substitution bias problem causes the CPI to:

Cost-push inflation occurs:

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

Suppose you place $10,000 in a retirement fund that earns a nominal interest rate of 8 percent. If you expect inflation to be 5 percent or lower, then you are expecting to earn a real interest rate of at least:

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 take-home pay in 2000?

The real interest rate is defined as the:

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 you received a 5 percent increase in your nominal wage. Over the year, inflation ran about 2 percent. Which of the following is true ?

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?

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

Which of the following is not a cause of cost-push inflation?

Exhibit 7-1 Consumer Price Index As shown in Exhibit 7-1, the rate of inflation for Year 2 is:

Introducing the Economic Way of Thinking

Production Possibilities Opportunity Cost and Economic Growth

Market Demand and Supply

Markets in Action

Price Elasticity of Demand and Supply

Consumer Choice Theory

Production Costs

Perfect Competition

Monopoly

Monopolistic Competition and Oligopoly

Labor Markets

Income Distribution Poverty and Discrimination

Antitrust and Regulation

Environmental Economics

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

Understanding Direct and Inverse Relationships between Variables

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