Question 1

Inflation occurs when there is an increase in the purchasing power of money.

Accepted Answer

A) True 
 B)False

Question 2

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 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

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 5

Exhibit 13-2  Consumer Price Index   As shown in Exhibit 13-2, 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.

Question 6

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 7

Which one of the following groups benefits from inflation?

Accepted Answer

A)  Borrowers. 
B)  Savers. 
C)  Landlords. 
D)  Lenders. 
A)  Borrowers. 
B)  Savers. 
C)  Landlords. 
D)  Lenders.

Question 8

Which of the following is true of inflation?

Accepted Answer

A)  It is an increase in the general price level of goods and services. 
B)  The purchasing power of money increases as the result of inflation. 
C)  Inflation is similar to interest payments on future money income, such as pensions and receipts from outstanding loans. 
D)  Inflation has no effect on real income. 
A)  It is an increase in the general price level of goods and services. 
B)  The purchasing power of money increases as the result of inflation. 
C)  Inflation is similar to interest payments on future money income, such as pensions and receipts from outstanding loans. 
D)  Inflation has no effect on real income.

Question 9

Cost-push inflation is a result of an increase in the per unit costs of production.

Accepted Answer

A) True 
 B)False

Question 10

If the bank offers you a nominal interest rate of 9 percent on a student loan, and if inflation is 6 percent, then what is the real interest rate?

Accepted Answer

A)  15 percent. 
B)  9 percent. 
C)  6 percent. 
D)  3 percent. 
A)  15 percent. 
B)  9 percent. 
C)  6 percent. 
D)  3 percent.

Question 11

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 the above. 
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 the above.

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

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)  a redistribution of wealth from borrowers to lenders. 
B)  a net gain in purchasing power for lenders relative to borrowers. 
C)  no change in the distribution of wealth between lenders and borrowers. 
D)  none of the above. 
A)  a redistribution of wealth from borrowers to lenders. 
B)  a net gain in purchasing power for lenders relative to borrowers. 
C)  no change in the distribution of wealth between lenders and borrowers. 
D)  none of the above.

Question 14

Which of the following statements is true ?

Accepted Answer

A)  Demand-pull inflation is caused by excess 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 falls, real interest rates increase. 
D)  If real interest rates are negative, lenders incur losses. 
E)  All of the above. 
A)  Demand-pull inflation is caused by excess 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 falls, real interest rates increase. 
D)  If real interest rates are negative, lenders incur losses. 
E)  All of the above.

Question 15

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 16

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 17

The real interest rate can be negative.

Accepted Answer

A) True 
 B)False

Question 18

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 19

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 20

The consumer price index (CPI):

Accepted Answer

A)  adjusts for changes in product quality. 
B)  includes separate market baskets of goods and services for both base and current years. 
C)  includes only goods and services bought by typical urban consumer. 
D)  uses current year quantities of goods and services. 
A)  adjusts for changes in product quality. 
B)  includes separate market baskets of goods and services for both base and current years. 
C)  includes only goods and services bought by typical urban consumer. 
D)  uses current year quantities of goods and services.

Exam 13: Inflation

Inflation occurs when there is an increase in the purchasing power of money.

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

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

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?

Exhibit 13-2 Consumer Price Index As shown in Exhibit 13-2, the rate of inflation for Year 2 is:

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?

Which one of the following groups benefits from inflation?

Which of the following is true of inflation?

Cost-push inflation is a result of an increase in the per unit costs of production.

If the bank offers you a nominal interest rate of 9 percent on a student loan, and if inflation is 6 percent, then what is the real interest rate?

Demand-pull inflation occurs:

Demand-pull inflation is associated with:

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:

Which of the following statements is true ?

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

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?

The real interest rate can be negative.

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

The best definition of inflation is a(n):

The consumer price index (CPI):

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

Filters