Question 1

Inflation:

Accepted Answer

A)  reduces the cost-of-living of the typical worker. 
B)  is measured by changes in the cost of a typical market basket of goods between time periods. 
C)  causes the purchasing power of a dollar to rise. 
D)  has no effect on real income. 
A)  reduces the cost-of-living of the typical worker. 
B)  is measured by changes in the cost of a typical market basket of goods between time periods. 
C)  causes the purchasing power of a dollar to rise. 
D)  has no effect on real income.

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

Question 3

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 4

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 5

An increase in the general price level is termed:

Accepted Answer

A)  the Consumer Price Index. 
B)  inflation. 
C)  deflation. 
D)  stagflation. 
E)  nominal pricing. 
A)  the Consumer Price Index. 
B)  inflation. 
C)  deflation. 
D)  stagflation. 
E)  nominal pricing.

Question 6

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 7

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

Question 8

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 10 percent,:

Accepted Answer

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

Question 9

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 10

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 11

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 12

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 13

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 14

The nominal rate of interest is equal to the real interest rate plus the inflation rate.

Accepted Answer

A) True 
 B)False

Question 15

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 16

If consumers reduce the purchase of goods whose relative prices rise (substitution bias), the consumer price index (CPI) will tend to have an upward bias over time (overstates inflation).

Accepted Answer

A) True 
 B)False

Question 17

Which of the following statements is true ?

Accepted Answer

A)  Deflation is an increase in the general level of prices. 
B)  The consumer price index (CPI) measures changes in the average prices of consumer goods and services. 
C)  Disinflation is an increase in the rate of inflation. 
D)  Real income is the actual number of dollars received over a period of time. 
E)  The real interest rate equals the nominal rate of interest plus the inflation rate. 
A)  Deflation is an increase in the general level of prices. 
B)  The consumer price index (CPI) measures changes in the average prices of consumer goods and services. 
C)  Disinflation is an increase in the rate of inflation. 
D)  Real income is the actual number of dollars received over a period of time. 
E)  The real interest rate equals the nominal rate of interest plus the inflation rate.

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

If the inflation rate exceeds the nominal rate of interest,

Accepted Answer

A)  the real interest rate is negative. 
B)  lenders lose. 
C)  savers lose. 
D)  all of the above. 
A)  the real interest rate is negative. 
B)  lenders lose. 
C)  savers lose. 
D)  all of the above.

Question 20

Which of the following would understate the consumer price index?

Accepted Answer

A)  Substitution bias. 
B)  Deteriorating quality of products. 
C)  Improving quality of products. 
D)  Law of demand bias. 
A)  Substitution bias. 
B)  Deteriorating quality of products. 
C)  Improving quality of products. 
D)  Law of demand bias.

Exam 13: Inflation

Inflation:

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?

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

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:

An increase in the general price level is termed:

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:

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

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 10 percent,:

Demand-pull inflation is due to:

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:

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.

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 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?

The nominal rate of interest is equal to the real interest rate plus the inflation rate.

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?

If consumers reduce the purchase of goods whose relative prices rise (substitution bias), the consumer price index (CPI) will tend to have an upward bias over time (overstates inflation).

Which of the following statements is true ?

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

If the inflation rate exceeds the nominal rate of interest,

Which of the following would understate the consumer price index?

Introducing the Economic Way of Thinking

Production Possibilities, Opportunity Cost, and Economic Growth

Market Demand and Supply

Markets in Action

Price Elasticity of Demand

Production Costs

Perfect Competition

Monopoly

Monopolistic Competition and Oligopoly

Labor Markets and Income Distribution

Gross Domestic Product

Business Cycles and Unemployment

Aggregate Demand and Supply

Fiscal Policy

The Public Sector

Federal Deficits, Surpluses, and the National Debt

Money and the Federal Reserve System

Money Creation

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

International Trade and Finance

Economies in Transition

Growth and the Less-Developed Countries

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