Question 1

A reduction in the rate of inflation is called:

Accepted Answer

A)  deflation. 
B)  disinflation. 
C)  hyperinflation. 
D)  cost-push inflation. 
A)  deflation. 
B)  disinflation. 
C)  hyperinflation. 
D)  cost-push inflation.

Question 2

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

Question 3

The salary of the president of the United States in 2000 was $400,000. In 1940, the president's salary was $75,000. If the Consumer Price Index was 8.1 in 1940 and 100 in 2000, the 1940 presidential salary measured in terms of the purchasing power of the dollar in 2000 would be:

Accepted Answer

A)  less than $75,000. 
B)  less than $400,000. 
C)  approximately $668,850. 
D)  approximately $926,000. 
A)  less than $75,000. 
B)  less than $400,000. 
C)  approximately $668,850. 
D)  approximately $926,000.

Question 4

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 5

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 6

Exhibit 7-1 Consumer Price Index
 
As shown in Exhibit 7-1, the rate of inflation for Year 5 is:

Accepted Answer

A)  4.2 percent 
B)  5 percent. 
C)  20 percent. 
D)  25 percent. 
A)  4.2 percent 
B)  5 percent. 
C)  20 percent. 
D)  25 percent.

Question 7

Suppose your nominal income this year is 5 percent higher than last year. If the inflation rate for the period was 3 percent, then your real income was:

Accepted Answer

A)  increased by 1.67 percent. 
B)  increased by 2 percent. 
C)  increased by 8 percent. 
D)  decreased by 0.6 percent. 
A)  increased by 1.67 percent. 
B)  increased by 2 percent. 
C)  increased by 8 percent. 
D)  decreased by 0.6 percent.

Question 8

Which of the following statements is true ?

Accepted Answer

A)  Demand-pull inflation is caused by insufficient total spending. 
B)  Cost-push inflation is caused by an increase in resource costs. 
C)  If nominal interest rates remain the same and the inflation rate rises, real interest rates increase. 
D)  If real interest rates are positive, lenders incur losses. 
A)  Demand-pull inflation is caused by insufficient total spending. 
B)  Cost-push inflation is caused by an increase in resource costs. 
C)  If nominal interest rates remain the same and the inflation rate rises, real interest rates increase. 
D)  If real interest rates are positive, lenders incur losses.

Question 9

Price indexes like the CPI are calculated using a base year. The term base year refers to:

Accepted Answer

A)  the first year that price data are available. 
B)  any year in which inflation was higher than 5 percent. 
C)  the most recent year in which the business cycle hit the trough. 
D)  an arbitrarily chosen reference year. 
A)  the first year that price data are available. 
B)  any year in which inflation was higher than 5 percent. 
C)  the most recent year in which the business cycle hit the trough. 
D)  an arbitrarily chosen reference year.

Question 10

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 11

Suppose hypothetically that you buy a lot of food such as tofu, veggie burgers, and organic fruit that are not included in the market basket used to compute the CPI. In addition, suppose that all of these goods have become cheaper over the last year, while the overall CPI has increased by 6 percent. Then which of the following is true ?

Accepted Answer

A)  The CPI will understate the negative impact of inflation on your purchasing power and standard of living. 
B)  The CPI will still accurately state the negative impact of inflation on your purchasing power and standard of living. 
C)  The CPI will overstate the negative impact of inflation on your purchasing power and standard of living. 
D)  Inflation has a larger effect on your standard of living than on the average consumer. 
A)  The CPI will understate the negative impact of inflation on your purchasing power and standard of living. 
B)  The CPI will still accurately state the negative impact of inflation on your purchasing power and standard of living. 
C)  The CPI will overstate the negative impact of inflation on your purchasing power and standard of living. 
D)  Inflation has a larger effect on your standard of living than on the average consumer.

Question 12

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 13

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 14

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

Accepted Answer

The CPI is criticized as a measure of in

Question 15

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. 
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.

Question 16

During periods of hyperinflation, which of the following is the most likely response of consumers?

Accepted Answer

A)  Save as much as possible. 
B)  Spend money as fast as possible. 
C)  Invest as much as possible. 
D)  Lend money. 
A)  Save as much as possible. 
B)  Spend money as fast as possible. 
C)  Invest as much as possible. 
D)  Lend money.

Question 17

Losers from inflation include:

Accepted Answer

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

Question 18

A worker would be hurt least by inflation when the:

Accepted Answer

A)  worker anticipates inflation and increases savings at the bank. 
B)  worker is protected by a cost-of-living adjustment clause in an employment contract. 
C)  price level increases but at a decreasing rate. 
D)  worker is protected by fixed annual increases in wages and benefits in an employment contract. 
A)  worker anticipates inflation and increases savings at the bank. 
B)  worker is protected by a cost-of-living adjustment clause in an employment contract. 
C)  price level increases but at a decreasing rate. 
D)  worker is protected by fixed annual increases in wages and benefits in an employment contract.

Question 19

Suppose the Organization of Petroleum Exporting Countries (OPEC) sharply increased the price of oil, which triggered higher inflation rates in the United States. This type of inflation is best classified as:

Accepted Answer

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

Question 20

Which of the following can create demand-pull inflation?

Accepted Answer

A)  Excessive aggregate spending. 
B)  Sharply rising oil prices. 
C)  Higher labor costs. 
D)  Recessions and depressions. 
A)  Excessive aggregate spending. 
B)  Sharply rising oil prices. 
C)  Higher labor costs. 
D)  Recessions and depressions.

Exam 17: Inflation

A reduction in the rate of inflation is called:

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?

The salary of the president of the United States in 2000 was $400,000. In 1940, the president's salary was $75,000. If the Consumer Price Index was 8.1 in 1940 and 100 in 2000, the 1940 presidential salary measured in terms of the purchasing power of the dollar in 2000 would be:

Demand-pull inflation is associated with:

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?

Exhibit 7-1 Consumer Price Index As shown in Exhibit 7-1, the rate of inflation for Year 5 is:

Suppose your nominal income this year is 5 percent higher than last year. If the inflation rate for the period was 3 percent, then your real income was:

Which of the following statements is true ?

Price indexes like the CPI are calculated using a base year. The term base year refers 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:

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:

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?

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

In periods of high inflation,

During periods of hyperinflation, which of the following is the most likely response of consumers?

Losers from inflation include:

A worker would be hurt least by inflation when the:

Suppose the Organization of Petroleum Exporting Countries (OPEC) sharply increased the price of oil, which triggered higher inflation rates in the United States. This type of inflation is best classified as:

Which of the following can create demand-pull inflation?

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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