Chapter 7: Inflation

Chapter 7: Inflation
Multiple Choice Questions

WHAT IS INFLATION?

1. Inflation rates above 1 per!ent rarel" o!!#r: A$ In the %orl& to&a". *$ In the +nite& States. Ans%er: * T"pe: *asi! +n&erstan&in( ,a(e: 1-

C$ '#rin( %arti)e perio&s. '$ In or &#rin( all of the above.

.. An in!rease in the avera(e level of pri!es of (oo&s an& servi!es is: A$ 'eflation. *$ /e!ession. C$ 'epression. '$ Inflation. Ans%er: ' T"pe: 'efinition ,a(e: 1-

-. Whi!h of the follo%in( is tr#e abo#t a perio& of inflation? A$ ,ri!es of all (oo&s sta" the sa)e or are risin(. C$ The avera(e pri!e level is risin(. *$ All pri!es are risin(. '$ All of the above. Ans%er: C T"pe: 'efinition ,a(e: 1-

0. Inflation )e A$ Spe!ifi! pri!es are risin(1 an& relative pri!es are fallin(. *$ *oth relative pri!es an& avera(e pri!es are risin(. C$ /elative pri!es are risin(1 b#t it is not !ertain %hat is happenin( to avera(e pri!es. '$ Avera(e pri!es are risin(1 b#t it is not !ertain %hat is happenin( to relative pri!es. Ans%er: ' T"pe: 'efinition ,a(e: 1-

2. A &e!rease in the avera(e level of pri!es of (oo&s an& servi!es is: A$ 'eflation. *$ /e!ession. C$ 'epression. '$ Inflation. Ans%er: A T"pe: 'efinition ,a(e: 1-

3. When there is no &eflation or inflation: A$ ,ri!es of all (oo&s !han(e b" the sa)e per!enta(e. *$ /elative pri!es re)ain #n!han(e&. C$ Avera(e pri!es rise b" 4ero per!ent. '$ F#ll e)plo")ent is a!hieve&. Ans%er: C T"pe: 'efinition ,a(e: 1-

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Chapter 7: Inflation

+se the follo%in( to ans%er 5#estions 761 : Figure 7.1

, 7 / C 7 N T A 8 7 C H A N 8 7 IN C O N S + 9 7 / , / IC 7 IN ' 7 :

= 3 0 .

C o # n tr" * C o # n tr" A

6. 60

1<7

1<72

1<=

1<=2
; 7A /

1<<

1<<2

7. A!!or&in( to Fi(#re 7.1 in Co#ntr" A: A$ /elative pri!es )a" be !han(in( b#t avera(e pri!es are !onstant. *$ /elative pri!es are &efinitel" !onstant. C$ Avera(e pri!es an& relative pri!es are &efinitel" !han(in(. '$ Avera(e pri!es are !onstant an& #ne)plo")ent is in!reasin(. Ans%er: A T"pe: Co)ple> +n&erstan&in( ,a(e: 1-

=. A!!or&in( to Fi(#re 7.11 %hi!h of the follo%in( state)ents is &efinitel" tr#e abo#t Co#ntr" *? A$ /elative pri!es are !han(in(. C$ /eal in!o)es are &e!reasin(. *$ Avera(e pri!e levels are !han(in(. '$ /elative pri!es are !onstant. Ans%er: * T"pe: Co)ple> +n&erstan&in( ,a(e: 1-

<. A!!or&in( to Fi(#re 7.11 %hi!h of the follo%in( state)ents is &efinitel" tr#e abo#t Co#ntr" A? A$ /eal in!o)es are !han(in(. *$ /elative pri!es are not !han(in(. C$ There are no re&istrib#tive effe!ts on in!o)e an& %ealth fro) inflation. '$ All of the above are tr#e. Ans%er: C T"pe: Co)ple> +n&erstan&in( ,a(e: 1-

1 . '#rin( the ti)e perio& represente& in Fi(#re 7.11 Co#ntr" A: A$ 7>perien!e& perio&s of both inflation an& &eflation. *$ Never a!hieve& the inflation (oal set b" the F#ll 7)plo")ent an& *alan!e& 8ro%th A!t of 1<7=. C$ Ha& no nee& for COLAs. '$ 7>perien!e& onl" inflation.

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Chapter 7: Inflation

Ans%er: C T"pe: Co)ple> +n&erstan&in( ,a(e: 1-

+se the follo%in( to ans%er 5#estions 1161.: Figure 7.2

, 7 / C 7 N T A 8 7 C H A N 8 7 IN C O N S + 9 7 / , / IC 7 IN ' 7 :

= 3 0 . C o # n tr" * 6. 60 C o # n tr" A

1<7

1<72

1<=

1<=2
; 7A /

1<<

1<<2

11. A!!or&in( to Fi(#re 7..1 Co#ntr" *: A$ Ha& less inflation ea!h "ear than Co#ntr" A. *$ Ha& less inflation than Co#ntr" A on avera(e b#t ha& a hi(her level of #ne)plo")ent. C$ 7>perien!e& perio&s of both inflation an& &eflation. '$ Ha& an inflation rate of 0 per!ent per "ear. Ans%er: C T"pe: Co)ple> +n&erstan&in( ,a(e: 1-

1.. Whi!h of the follo%in( state)ents is tr#e abo#t the t%o !o#ntries represente& in Fi(#re 7.. in the "ear 1<<2? A$ The !o#ntries ha& appro>i)atel" the sa)e rate of inflation. *$ The !o#ntries ha& appro>i)atel" the sa)e C,I ?ass#)in( 1<7 %as the base "ear$. C$ The avera(e pri!e level %as appro>i)atel" the sa)e. '$ All of the above are tr#e. Ans%er: A T"pe: Anal"ti!al ,a(e: 1-

1-. Chan(es in relative pri!es )a" o!!#r in a perio& of: A$ Stable pri!es. *$ Inflation. C$ 'eflation. '$ All of the above. Ans%er: ' T"pe: *asi! +n&erstan&in( ,a(e: 1-

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Chapter 7: Inflation

10. Chan(es in the relative pri!es of t%o (oo&s in&i!ate: A$ Inflation. *$ No)inal pri!e !han(es a&@#ste& for the inflation in the pri!e of the (oo&s. C$ That avera(e pri!es for the perio& )#st not be stable. '$ Chan(es in the &esire& )i> of o#tp#t. Ans%er: ' T"pe: 'efinition ,a(e: 1-

12. Whi!h of the follo%in( f#n!tions are perfor)e& b" !han(es in relative pri!es but not by !han(es in avera(e pri!es? A$ Co)p#tin( real in!o)e fro) no)inal in!o)e. C$ Si(nalin( !han(es in the &esire& )i> of o#tp#t. *$ In&i!atin( an overheatin( e!ono)". '$ 9eas#rin( the rates of inflation. Ans%er: C T"pe: *asi! +n&erstan&in( ,a(e: 1-

13. If the pri!e of !o)p#ters falls 3 per!ent &#rin( a perio& %hen the level of avera(e pri!es falls 1. per!ent1 the relative pri!e of !o)p#ters !o)pare& %ith other (oo&s: A$ Sta"s the sa)e. *$ In!reases. C$ 'e!reases. '$ 9ore infor)ation is re5#ire&. Ans%er: * T"pe: 'efinition ,a(e: 1-

17. If the pri!e of health servi!es rises 1- per!ent &#rin( a perio& %hen the level of avera(e pri!es rises 1per!ent1 the relative pri!e of health servi!es !o)pare& %ith other (oo&s an& servi!es: A$ Sta"s the sa)e. *$ In!reases. C$ 'e!reases. '$ 9ore infor)ation is re5#ire&. Ans%er: A T"pe: 'efinition ,a(e: 1-

1=. If the pri!e of !o)p#ters falls 1. per!ent &#rin( a perio& %hen the level of avera(e pri!es falls 3 per!ent1 the relative pri!e of !o)p#ters: A$ Sta"s the sa)e. *$ In!reases. C$ 'e!reases. '$ 9ore infor)ation is re5#ire&. Ans%er: C T"pe: *asi! +n&erstan&in( ,a(e: 1-

1<. When the pri!e of a (oo& &e!reases )ore slo%l" than an in&e> of avera(e pri!es &e!reases1 then the (oo&As relative pri!e: A$ Has risen %hile its absol#te pri!e has fallen. C$ An& absol#te pri!e have fallen. *$ An& absol#te pri!e have risen. '$ Has fallen %hile its absol#te pri!e has risen. Ans%er: A T"pe: *asi! +n&erstan&in( ,a(e: 1-

. . When the pri!e of a (oo& is in!reasin( )ore slo%l" than an in&e> of avera(e pri!es1 then (enerall" the (oo&As relative pri!e: A$ Has risen %hile its absol#te pri!e has fallen. C$ An& absol#te pri!e have fallen. *$ An& absol#te pri!e have risen. '$ Has fallen %hile its absol#te pri!e has risen. Ans%er: ' T"pe: *asi! +n&erstan&in( ,a(e: 1-

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Chapter 7: Inflation

.1. Co)parin( relative pri!es is )ore #sef#l than e>a)inin( avera(e pri!es in: A$ 'eter)inin( the re&istrib#tion of in!o)e as a res#lt of inflation. *$ 'eter)inin( the inflation rate. C$ 'eflatin( no)inal in!o)e. '$ All of the above. Ans%er: A T"pe: *asi! +n&erstan&in( ,a(e: 1-

/7ST/I*+TIB7 7FF7CTS OF INFLATION

... Whi!h of the follo%in( e>plains %h" &estrib#tin o!!#rs &#rin( inflation? A$ /isin( pri!es fail to si(nal &esirable !han(es in the )i> of o#tp#t. *$ ,eople b#" &ifferent !o)binations of (oo&s an& servi!es an& o%n &ifferent !o)binations of %ealth. C$ /elative pri!es re)ain #n!han(e&. '$ All of the above are the !ase. Ans%er: * T"pe: *asi! +n&erstan&in( ,a(e: 1-1

.-. Whi!h of the follo%in( res#lts fro) #ne>pe!te& in!reases in the rate of inflation? A$ 'e!rease& #n!ertaint". *$ In!rease& %in&fall profits to !re&itors %ho have lent lar(e a)o#nts of )one". C$ /e&istrib#tionAs of in!o)e an& %ealth bet%een &ifferent (ro#ps. '$ All of the above. Ans%er: C T"pe: *asi! +n&erstan&in( ,a(e: 1-1

.0. Inflation f#n!tions as a re&istrib#tion )e!hanis) be!a#se people: A$ *#" &ifferent (oo&s an& servi!es for %hi!h relative pri!es !han(e &#rin( inflation. *$ O%n &ifferent assets for %hi!h relative )arCet val#es !han(e %ith inflation. C$ Have in!o)es %hi!h respon& &ifferentl" to inflation. '$ All of the above are !orre!t. Ans%er: ' T"pe: *asi! +n&erstan&in( ,a(e: 1-1

.2. *e!a#se so)e peopleAs in!o)es rise faster than inflation %hile others peopleAs in!o)es rise )ore slo%l": A$ There are no a&verse effe!ts fro) inflation. C$ A/9s %ere !reate&. *$ There are re&istrib#tion effe!ts fro) inflation. '$ ,eople shorten their ti)e hori4ons. Ans%er: * T"pe: *asi! +n&erstan&in( ,a(e: 1-1

.3. Inflation res#lts in a re&istrib#tion of in!o)e an& %ealth be!a#se people: A$ *#" &ifferent (oo&s an& servi!es for %hi!h relative pri!es !han(e &#rin( inflation. *$ O%n &ifferent Cin&s of assets %hose relative )arCet val#es !han(e &#rin( inflation. C$ /e!eive in!o)es %hose real p#r!hasin( po%er !han(es &#rin( inflation.

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Chapter 7: Inflation

'$ All of the above. Ans%er: ' T"pe: Anal"ti!al ,a(e: 1-1

.7. I)portant )i!roe!ono)i! !onse5#en!es of inflation in!l#&e all of the follo%in( except: A$ C"!li!al #ne)plo")ent. *$ In!o)e effe!ts. C$ Wealth effe!ts. '$ ,ri!e effe!ts. Ans%er: A T"pe: *asi! +n&erstan&in( ,a(e: 1-1

.=. Whi!h of the follo%in( is a )i!roe!ono)i! !onse5#en!e of inflation? A$ A pri!e effe!t. *$ An in!o)e effe!t. C$ A %ealth effe!t. '$ All of the above. Ans%er: ' T"pe: *asi! +n&erstan&in( ,a(e: 1-1

.<. A )i!roe!ono)i! !onse5#en!e of inflation is: A$ Hi(her #ne)plo")ent. *$ The pri!e effe!t. Ans%er: * T"pe: *asi! +n&erstan&in( ,a(e: 1-1

C$ A lo%er real 8',.

'$ All of the above.

- . ;o#r no)inal in!o)e: A$ Is the a)o#nt of )one" "o# re!eive &#rin( a (iven ti)e perio&. *$ Is )eas#re& in !#rrent &ollars. C$ 'oes not )eas#re p#r!hasin( po%er. '$ All of the above. Ans%er: ' T"pe: 'efinition ,a(e: 1--

-1. The ter) Dno)inal in!o)eD refers to: A$ 9one" in!o)e a&@#ste& for an" !han(e in the pri!e level. *$ /eal p#r!hasin( po%er. C$ /eal p#r!hasin( po%er &eflate& for risin( pri!es. '$ 9one" in!o)e )eas#re& in !#rrent &ollars. Ans%er: ' T"pe: 'efinition ,a(e: 1--

-.. ;o#r real in!o)e is: A$ The a)o#nt of )one" "o# re!eive &#rin( a (iven ti)e perio&. *$ 9eas#re& in !#rrent &ollars. C$ The p#r!hasin( po%er of the )one" "o# re!eive. '$ All of the above. Ans%er: C T"pe: 'efinition ,a(e: 1--

--. If the n#)ber of &ollars "o# re!eive ever" "ear in in!o)e is the sa)e1 b#t pri!es are risin(1 then "o#r

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Chapter 7: Inflation

no)inal in!o)e: A$ /ises an& "o#r real in!o)e rises. *$ /ises b#t "o#r real in!o)e falls.

C$ Falls b#t "o#r real in!o)e rises. '$ Sta"s the sa)e b#t "o#r real in!o)e falls.

Ans%er: ' T"pe: Co)ple> +n&erstan&in( ,a(e: 1--

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Chapter 7: Inflation

-0. When the pri!e of a pro&#!t rises faster than the inflation rate: A$ The no)inal in!o)es of the #sers of that pro&#!t fall. *$ The #sers of that pro&#!t have hi(her real in!o)es than people %ho &o not #se the pro&#!t. C$ The no)inal in!o)es of the #sers of that pro&#!t rise. '$ The real in!o)es of the #sers of that pro&#!t fall. Ans%er: ' T"pe: *asi! +n&erstan&in( ,a(e: 1--

-2. If inflation is 1- per!ent per "ear an& "o# re!eive no raise1 then "o#r: A$ /eal in!o)e falls1 b#t "o#r no)inal in!o)e re)ains #n!han(e&. *$ /eal an& no)inal in!o)e both fall. C$ /eal in!o)e re)ains #n!han(e&1 b#t "o#r no)inal in!o)e rises. '$ /eal in!o)e re)ains #n!han(e&1 b#t "o#r no)inal in!o)e falls. Ans%er: A T"pe: Co)ple> +n&erstan&in( ,a(e: 1--

-3. If inflation is 12 per!ent per "ear an& "o# re!eive a 11 per!ent raise in in!o)e1 then "o#r: A$ /eal an& no)inal in!o)e both fall. C$ /eal in!o)e falls1 b#t no)inal in!o)e rises. *$ /eal an& no)inal in!o)e both rise. '$ /eal in!o)e rises1 b#t no)inal in!o)e falls. Ans%er: C T"pe: Co)ple> +n&erstan&in( ,a(e: 1--

-7. Whi!h of the follo%in( (ro#ps is prote!te& fro) a s#&&en in!rease in inflation? A$ *orro%ers %ho have loans at fi>e& interest rates. *$ Fi>e&6in!o)e (ro#ps. C$ WorCers %ho re!eive fi>e& %a(es #n&er )#lti"ear !ontra!ts. '$ ,eople %ho rent their ho)es in !o)parison %ith those %ho o%n their ho)es. Ans%er: A T"pe: *asi! +n&erstan&in( ,a(e: 1-0

-=. Whi!h of the follo%in( is a )i!roe!ono)i! !onse5#en!e of inflation? A$ 8reater #ne)plo")ent. *$ 9one" ill#sion. C$ The %ealth effe!t. Ans%er: C T"pe: 'efinition ,a(e: 1-0

'$ All of the above.

-<. 8enerall" speaCin(1 %hi!h of the follo%in( (ro#ps %o#l& ten& to (ain real in!o)e fro) the %ealth effe!ts of inflation? A$ ,eople %ith fi>e& in!o)e. *$ ,eople %ho have passbooC savin(s a!!o#nts. C$ ,eople %ho o%n assets that are appre!iatin( faster than the inflation rate. '$ ,eople %ho hol& all of their assets in the for) of !ash. Ans%er: C T"pe: Co)ple> +n&erstan&in( ,a(e: 1-0

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Chapter 7: Inflation

0 . '#rin( a perio& of #nanti!ipate& inflation: A$ 'ebtors are better off an& !re&itors are %orse off. *$ 'ebtors an& !re&itors are both better off be!a#se of lo%er real interest rates. C$ In&ivi&#als on fi>e& in!o)es are better off. '$ All in&ivi&#als are %orse off be!a#se of the level of #n!ertaint". Ans%er: A T"pe: Co)ple> +n&erstan&in( ,a(e: 1-0

+se the follo%in( to ans%er 5#estions 0160-: Figure 7.3

IN ' 7 : O F N O 9 IN A L W A 8 7 S A N ' , / IC 7 S

. 1= 13 10 1. 1 1<7 1<72 1<= 1<=2

; 7A /

, ri! e s

W a(es

1<<

1<<2

01. A!!or&in( to Fi(#re 7.-1 an in!rease in avera(e pri!es is a!!o)panie& b": A$ An in!rease in avera(e %a(es so so)e people )a" not be %orse off &#rin( inflation. *$ An in!rease in avera(e %a(es so inflation &oes not !a#se a re&istrib#tion of in!o)e. C$ A slo%er in!rease in avera(e %a(es be!a#se pro&#!tivit" has in!rease&. '$ A slo%er in!rease in avera(e %a(es an& all in&ivi&#als are a&versel" affe!te& b" inflation. Ans%er: A T"pe: Co)ple> +n&erstan&in( ,a(e: 1-.

0.. '#rin( the ti)e perio& represente& in Fi(#re 7.-1 the p#r!hasin( po%er of the avera(e %orCer: A$ In!rease& be!a#se no)inal %a(es in!rease&. *$ 'e!rease& be!a#se real in!o)e &e!rease&. C$ Sta"e& the sa)e be!a#se COLAs probabl" Cept p#r!hasin( po%er appro>i)atel" !onstant. '$ 'e!rease& be!a#se no)inal in!o)e &e!rease&. Ans%er: * T"pe: Co)ple> +n&erstan&in( ,a(e: 1-.

0-. Whi!h of the follo%in( &efinitel" o!!#rre& in the e!ono)" &epi!te& in Fi(#re 7.-? A$ /e!ession. *$ Sta(flation. C$ 7!ono)i! (ro%th. '$ Inflation. Ans%er: ' T"pe: Co)ple> +n&erstan&in( ,a(e: 1-

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Chapter 7: Inflation

00. When people )aCe their &e!isions on the basis of the fa!e val#e of !#rren!" rather than the real val#e1 their &e!isions refle!t: A$ The pri!e effe!t of inflation. C$ The %ealth effe!t of inflation. *$ The in!o)e effe!t of inflation. '$ 9one" ill#sion. Ans%er: ' T"pe: Co)ple> +n&erstan&in( ,a(e: 1-3

02. Those %ho s#ffer fro) )one" ill#sion: A$ /e!o(ni4e %hen their real in!o)e !han(es. *$ Are those %ho &o not have a COLA !la#se in their e)plo")ent !ontra!ts. C$ Conf#se !han(es in no)inal in!o)e %ith !han(es in real in!o)e. '$ Are those %ho %orC for less than the )ini)#) %a(e. Ans%er: C T"pe: 'efinition ,a(e: 1-3

9AC/O CONS7E+7NC7S

03. Whi!h of the follo%in( is a )a!ro !onse5#en!e of s#&&en !han(es in the avera(e level of pri!es? A$ ,eople on fi>e& in!o)es s#ffer. *$ +n!ertaint". C$ No)inal in!o)e falls b" a s)aller per!enta(e than real in!o)e. '$ All of the above. Ans%er: * T"pe: *asi! +n&erstan&in( ,a(e: 1-3

07. The #n!ertaint" that res#lts fro) inflation !han(es: A$ Cons#)ption1 savin(1 an& invest)ent behavior. *$ Savin( an& invest)ent behavior1 b#t not !ons#)ption. C$ Cons#)ption1 b#t not savin( an& invest)ent behavior. '$ In!o)e1 b#t not !ons#)ption. Ans%er: A T"pe: *asi! +n&erstan&in( ,a(e: 1-3

0=. Whi!h of the follo%in( is a )a!roe!ono)i! effe!t of inflation? A$ The pri!e effe!t. *$ The %ealth effe!t. C$ *ra!Cet !reep. Ans%er: C T"pe: 'efinition ,a(e: 1-3

'$ All of the above.

0<. Whi!h of the follo%in( )i(ht be a )a!roe!ono)i! effe!t of inflation? A$ /e&istrib#tion of in!o)e. C$ A lo%er real 8',. *$ /e&istrib#tion of %ealth. '$ All of the above. Ans%er: C T"pe: *asi! +n&erstan&in( ,a(e: 1-3

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Chapter 7: Inflation

2 . Whi!h of the follo%in( p#shes a !o#ntr" insi&e its pro&#!tion6possibilities !#rve? A$ A s#&&en b#rst of inflation %hi!h has not been anti!ipate&. *$ A s#&&en b#rst of &eflation %hi!h has not been anti!ipate&. C$ The %ithhol&in( of reso#r!es fro) the pro&#!tion pro!ess be!a#se of spe!#lation. '$ All of the above. Ans%er: ' T"pe: Co)ple> +n&erstan&in( ,a(e: 1-3

21. Inflation affe!ts pro&#!tion &e!isions be!a#se it: A$ In!reases e)plo")ent. *$ /e&#!es spe!#lation. C$ Ca#ses b#sinesses to fo!#s )ore on the f#t#re. '$ Ca#ses b#sinesses to be )ore !a#tio#s sin!e the f#t#re is #n!ertain. Ans%er: ' T"pe: Co)ple> +n&erstan&in( ,a(e: 1-7

2.. H"perinflation is: A$ An inflation rate in e>!ess of . per!ent1 lastin( at least one "ear. *$ An inflation rate in e>!ess of . per!ent1 lastin( at least one )onth. C$ A !o))on proble) in the +nite& States. '$ All of the above. Ans%er: A T"pe: *asi! +n&erstan&in( ,a(e: 1-7

2-. Spe!#lation &#rin( perio&s of inflation !an res#lt in: A$ ,eople b#"in( reso#r!es for resale later rather than #sin( the reso#r!es for !#rrent pro&#!tion. *$ A )ove)ent insi&e the instit#tional pro&#!tion6possibilities !#rve. C$ ,eople b#"in( (ol&1 silver1 @e%elr"1 et!. instea& of !apital for pro&#!tion. '$ All of the above. Ans%er: ' T"pe: *asi! +n&erstan&in( ,a(e: 1-7

20. *ra!Cet !reep refers to the: A$ 9ove)ent of ta>pa"ers into hi(her ta> bra!Cets as no)inal in!o)es (ro%. *$ 9ove)ent of ta>pa"ers into hi(her ta> bra!Cets as real in!o)es (ro%. C$ Fa!t that (overn)ents lose ta> reven#e &#rin( perio&s of inflation. '$ Ten&en!" for (overn)ents to lo%er ta> rates &#rin( perio&s of inflation. Ans%er: A T"pe: 'efinition ,a(e: 1-7

97AS+/IN8 INFLATION

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Chapter 7: Inflation

22. The Cons#)er ,ri!e In&e> is a )eas#re of the: A$ In&e> #se& to !o)p#te real 8', fro) no)inal 8',. *$ Chan(e in the avera(e pri!e of ship)ents of (oo&s an& servi!es in the +nite& States. C$ Avera(e pri!e of !ons#)er (oo&s an& servi!es in the !#rrent perio& relative to their pri!e in so)e base perio&. '$ Ann#al inflation rate in the pro&#!ersA (oo&s )arCet. Ans%er: C T"pe: 'efinition ,a(e: 1-=

23. To !onstr#!t the Cons#)er ,ri!e In&e>1 the *#rea# of Labor Statisti!s )#st: A$ Fin& o#t %hat people b#" %ith their in!o)es an& ho% the pri!es of %hat the" b#" !han(e. *$ Fin& o#t %h" people b#" %hat the" &o an& ho% the pri!es of %hat the" b#" !han(e. C$ Fin& o#t %hat is in the t"pi!al !ons#)er )arCet basCet on the basis of %hat pro&#!ers pro&#!e. '$ Con&#!t !ons#)er e>pen&it#re s#rve"s to &eter)ine ho% )#!h pri!es rise. Ans%er: A T"pe: 'efinition ,a(e: 1-=

27. In or&er to !o)p#te the real in!o)e of a ho#sehol&1 the in&e> that sho#l& be #se& is the: A$ C,I. *$ ,,I. C$ 8', &eflator. '$ COLA. Ans%er: A T"pe: *asi! +n&erstan&in( ,a(e: 1-=

2=. Whi!h of the follo%in( in&e>es (ives the best in&i!ation of the inflation rate fa!e& b" !ons#)ers? A$ The 8', &eflator. *$ The in&#strial6pro&#!tion in&e>. C$ The ,,I. '$ The C,I. Ans%er: ' T"pe: 'efinition ,a(e: 1-=

2<. A s#&&en in!rease in inflation1 ceteris paribus: A$ /aises the real in!o)e of len&ers relative to borro%ers. *$ /aises the C,I an& re&#!es real in!o)e. C$ /e&#!es the no)inal in!o)e of those %ho have !onstant real in!o)es. '$ 9aCes ever"one %orse off. Ans%er: * T"pe: *asi! +n&erstan&in( ,a(e: 1-=

3 . Ass#)e the C,I in!reases fro) 1 to 1. an& a personAs no)inal in!o)e in!reases fro) F. 1 F.01 over the sa)e perio&. This personAs real in!o)e has: A$ In!rease& b" 2 per!ent. C$ In!rease& b" . per!ent. *$ In!rease& b" 1 per!ent. '$ /e)aine& the sa)e. Ans%er: ' T"pe: Co)ple> +n&erstan&in( ,a(e: 1-=

to

31. The base perio& #se& in !o)p#tin( a pri!e in&e> is: A$ The "ear in %hi!h pri!es %ere at their lo%est level. *$ The "ear in %hi!h pri!es %ere at their avera(e level. C$ A re!ent "ear fro) %hi!h )eanin(f#l !o)parisons !an be )a&e.

,a(e 1.

Chapter 7: Inflation

'$ The earliest "ear for %hi!h &ata are available. Ans%er: C T"pe: 'efinition ,a(e: 1-=

3.. At the be(innin( of 1<<3 the C,I %as 10<.-. At the en& of 1<<3 it %as 12-.7. What %as the rate of inflation in 1<<3? A$ 0.0 per!ent. *$ 0. per!ent. C$ ..< per!ent. '$ 1. - per!ent. Ans%er: C T"pe: 'efinition ,a(e: 1-=

3-. In 1<<11 the C,I %as 1-1.1 an& in 1<<7 the C,I %as 12=... What %as the rate of inflation over this perio& of ti)e? A$ . .7 per!ent. *$ -1.1 per!ent. C$ .7.1 per!ent. '$ 17.1 per!ent. Ans%er: A T"pe: Anal"ti!al ,a(e: 1-=

30. If the Cons#)er ,ri!e In&e> rose fro) 137.0 in 1<=3 to -=<.0 in . 111 %hat %o#l& the inflation rate be over the perio&? A$ .... per!ent. *$ 10.= per!ent. C$ 0-. per!ent. '$ 1--. per!ent. Ans%er: ' T"pe: Anal"ti!al ,a(e: 1-=

32. If a pri!e in&e> rose fro) 13.. in 1<< to 01.3 in . 111 %hat %o#l& the inflation rate be over the perio&? A$ .27 per!ent. *$ ..27 per!ent. C$ -=.< per!ent. '$ 127 per!ent. Ans%er: ' T"pe: Anal"ti!al ,a(e: 1-=

33. If the C,I in!reases fro) . to .0 for one "ear1 the rate of inflation for that "ear is: A$ 1 per!ent. *$ 1. per!ent. C$ . per!ent. '$ 2 per!ent. Ans%er: C T"pe: Co)ple> +n&erstan&in( ,a(e: 1-=

37. If the C,I in!reases fro) 1 to 1- for one "ear1 the rate of inflation for that "ear is: A$ - per!ent. *$ 1- per!ent. C$ 1 per!ent. '$ 2 per!ent. Ans%er: A T"pe: Co)ple> +n&erstan&in( ,a(e: 1-=

3=. The ,,I is the best in&e> to )eas#re avera(e pri!e !han(es fa!e& b": A$ Cons#)ers. *$ ,ro&#!ers. C$ I)porters. '$ Labor #nions ne(otiatin( COLAs. Ans%er: * T"pe: *asi! +n&erstan&in( ,a(e: 10

3<. If "o# %ere intereste& in !hartin( pri!es !har(e& b" pro&#!ers of ener(" %hi!h of the follo%in( %o#l& "o#

,a(e 1-

Chapter 7: Inflation

#se? A$ The C,I.

*$ The ,,I.

C$ The 8', &eflator.

'$ The COLA.

Ans%er: * T"pe: *asi! +n&erstan&in( ,a(e: 10

7 . Whi!h of the follo%in( is often %at!he& !losel" as a !l#e to potential !han(es in !ons#)er pri!es in the f#t#re? A$ The C,I. *$ The ,,I. C$ The 8', &eflator. '$ The COLAs. Ans%er: * T"pe: *asi! +n&erstan&in( ,a(e: 10

71. Whi!h of the follo%in( #s#all" in!reases before the C,I in!reases? A$ 8', &eflator. *$ Cons#)er pri!e in&e>. C$ ,ro&#!er pri!e in&e>. Ans%er: C T"pe: *asi! +n&erstan&in( ,a(e: 10

'$ COLAs.

7.. At the be(innin( of 1<=2 the 8', &eflator %as =<.7. At the en& of . it %as 13-.7. The appro>i)ate rate of inflation over the perio& is: A$ 70. per!ent. *$ =..2 per!ent. C$ 20.= per!ent. '$ 1= . per!ent. Ans%er: * T"pe: Anal"ti!al ,a(e: 10

7-. The best pri!e in&e> to #se in !al!#latin( real 8', is: A$ An" of the in&e>es sin!e the" all refle!t pri!e level !han(es. *$ The C,I. C$ The ,,I. '$ The 8', &eflator. Ans%er: ' T"pe: *asi! +n&erstan&in( ,a(e: 10

70. Whi!h of the follo%in( refle!ts !han(es in e>pen&it#re patterns as %ell as pri!e !han(es? A$ The C,I. *$ The ,,I. C$ The 8', &eflator. '$ The COLA. Ans%er: C T"pe: Co)ple> +n&erstan&in( ,a(e: 10

72. If no)inal 8', is !onstant1 then the 8', &eflator varies inversel" %ith: A$ The #ne)plo")ent rate. *$ /eal 8',. C$ COLAs. '$ The C,I. Ans%er: * T"pe: Co)ple> +n&erstan&in( ,a(e: 10

73. If no)inal 8', is F31..2.3 billion an& the 8', &eflator is 1-0.71 then real 8', is: A$ F013.1.= billion. *$ F03.. billion. C$ F31-3 .- billion. '$ F31 < .< billion. Ans%er: A T"pe: Anal"ti!al ,a(e: 10

,a(e 10

Chapter 7: Inflation

77. If no)inal 8', is F=1=0..3 billion an& the 8', &eflator is 101.<1 then real 8', is: A$ F=1<=0.2 billion. *$ F3..- billion. C$ F31.-1.3 billion. '$ F=17 .7 billion. Ans%er: C T"pe: Anal"ti!al ,a(e: 10

,a(e 12

Chapter 7: Inflation

+se the follo%in( to ans%er 5#estions 7=6=.: Table 7.1 GD

! o " in a l G D #in b illio n s o f $ o lla r s % F 3 1< < . .0 7 10 - 1 .3 7 1= 0 - .. G D $ e fla to r 1 3 .. 1 < .1 1 1 . .C 12 12 12 I 1 .3 - .= 7 .=

1<<= 1<<< .

7=. +sin( the infor)ation in Table 7.11 the rate of inflation bet%een 1<<= an& 1<<< #sin( the C,I is: A$ 1.2 per!ent. *$ ... per!ent. C$ 3.. per!ent. '$ 0.1 per!ent. Ans%er: A T"pe: Anal"ti!al ,a(e: 1-=

7<. +sin( the infor)ation in Table 7.11 the rate of inflation bet%een 1<<< an& . A$ 3.. per!ent. *$ 0.1 per!ent. C$ 1. per!ent. '$ ..3 per!ent. Ans%er: ' T"pe: Anal"ti!al ,a(e: 1-=

#sin( the C,I is:

= . +sin( the infor)ation in Table 7.11 the rate of inflation bet%een 1<<= an& . A$ ..7 per!ent. *$ 2.7 per!ent. C$ 3.1 per!ent. '$ 0.1 per!ent. Ans%er: * T"pe: Anal"ti!al ,a(e: 10

#sin( the 8', &eflator is:

=1. +sin( the infor)ation in Table 7.11 the real 8', for 1<<< is: A$ F01=-.. billion. *$ F31=11.7 billion. C$ F312=0.. billion. Ans%er: * T"pe: *asi! +n&erstan&in( ,a(e: 10

'$ F31<=0.1 billion.

=.. +sin( the infor)ation in Table 7.11 the real 8', for . is: A$ F01<7 .- billion. *$ F31=11.7 billion. C$ F312=0.. billion. Ans%er: ' T"pe: Anal"ti!al ,a(e: 10

'$ F31<=0.1 billion.

TH7 8OAL: ,/IC7 STA*ILIT;

=-. ,ri!e stabilit" is &efine& as: A$ No !han(e in relative pri!es. *$ The absen!e of si(nifi!ant !han(es in the avera(e pri!e level. C$ An inflation rate of 4ero. '$ In!reases in pri!es e5#al to or less than the (ro%th rate of the e!ono)".

,a(e 13

Chapter 7: Inflation

Ans%er: * T"pe: *asi! +n&erstan&in( ,a(e: 10

=0. If so)e spe!ifi! pri!es fall1 so)e relative pri!es rise1 an& avera(e pri!es re)ain #n!han(e&1 then there has been a perio& of: A$ Stable pri!es. *$ Inflation. C$ 'eflation. '$ All of the above. Ans%er: A T"pe: 'efinition ,a(e: 10

=2. In the F#ll 7)plo")ent an& *alan!e& 8ro%th A!t of 1<7=: A$ Con(ress set an inflation (oal of - per!ent. *$ The ,resi&ent set an inflation (oal of 4ero per!ent. C$ Alan 8reenspan set an inflation (oal of 4ero per!ent. '$ An #ne)plo")ent (oal of 0 per!ent %as set1 b#t no inflation (oal !o#l& be set. Ans%er: A T"pe: *asi! +n&erstan&in( ,a(e: 10

=3. ,ri!e stabilit": A$ Is &efine& as a 4ero per!ent rate of inflation in the F#ll 7)plo")ent an& *alan!e& 8ro%th A!t of 1<7=. *$ Is tar(ete& at a - per!ent rate of inflation b" Alan 8reenspan1 the hea& of the Fe&eral /eserve. C$ Has been offi!iall" set b" Con(ress at - per!ent. '$ Has been a!hieve& !onsistentl" in the t%entieth !ent#r" in the +nite& States. Ans%er: C T"pe: 'efinition ,a(e: 10

=7. An inflation (oal set at a lo% rate b#t (reater than 4ero: A$ In!reases the level of #ne)plo")ent. *$ Li)its 8', (ro%th. C$ Allo%s for pri!e in!reases !a#se& b" 5#alit" i)prove)ents. '$ Ca#ses real 8', to &e!rease. Ans%er: C T"pe: Co)ple> +n&erstan&in( ,a(e: 101

==. An inflation (oal set at a lo% rate b#t (reater than 4ero allo%s: A$ The e!ono)" to a!hieve both f#ll e)plo")ent an& pri!e stabilit" at the sa)e ti)e. *$ For errors be!a#se of ne% pro&#!ts. C$ For pri!e in!reases !a#se& b" 5#alit" i)prove)ents. '$ All of the above. Ans%er: ' T"pe: Co)ple> +n&erstan&in( ,a(e: 101

=<. If the C,I &oesnAt )eas#re pro&#!t 5#alit" i)prove)ents1 then the C,I ten&s to: A$ +n&erstate the inflation rate. C$ +n&erstate e!ono)i! (ro%th. *$ Overstate the inflation rate. '$ *e artifi!iall" lo%. Ans%er: * T"pe: 'efinition ,a(e: 101

,a(e 17

Chapter 7: Inflation

,a(e 1=

Chapter 7: Inflation

TH7 HISTO/ICAL /7CO/'

< . Whi!h one of the follo%in( state)ents abo#t inflation in the +.S. is !orre!t? A$ ,rior to Worl& War II1 the +.S. e>perien!e& perio&s of both &eflation an& inflation. *$ The +.S. has e>perien!e& inflation virt#all" ever" "ear sin!e 1= . C$ Sin!e Worl& War II1 the +.S. e>perien!e& &eflation. '$ ,rior to Worl& War II1 the +.S. e>perien!e& &eflation virt#all" ever" "earG sin!e Worl& War II1 the +.S. has !onsistentl" e>perien!e& inflation. Ans%er: A T"pe: *asi! +n&erstan&in( ,a(e: 10.

<1. Whi!h one of the follo%in( state)ents abo#t inflation in the +.S. is !orre!t? A$ Sin!e the 8reat 'epression1 avera(e pri!es have risen al)ost ever" "ear. *$ The inflation rate %as 1-.2 per!ent in 1<= . C$ ,rior to Worl& War II1 the +.S. e>perien!e& perio&s of both &eflation an& inflation. '$ All of the above. Ans%er: ' T"pe: *asi! +n&erstan&in( ,a(e: 10.

CA+S7S OF INFLATION

<.. If !ons#)ers atte)pt to b#" )ore (oo&s than the e!ono)" !an pro&#!e1 the res#lt is: A$ +ne)plo")ent. *$ 'e)an&6p#ll inflation. C$ Cost6p#sh inflation. '$ The %ealth effe!t. Ans%er: * T"pe: *asi! +n&erstan&in( ,a(e: 100

<-. When pro&#!tion !osts in!rease an& pro&#!ers raise o#tp#t pri!es1 the res#lt is: A$ The pri!e effe!t. *$ +ne)plo")ent. C$ Cost6p#sh inflation. '$ 'e)an&6p#ll inflation. Ans%er: C T"pe: *asi! +n&erstan&in( ,a(e: 100

,/OT7CTIB7 97CHANIS9S

<0. Whi!h of the follo%in( a#to)ati!all" a&@#sts so)e no)inal %a(es to !han(in( pri!e in&e>es? A$ The C,I. *$ The ,,I. C$ The 8', &eflator. '$ The COLA. Ans%er: ' T"pe: 'efinition ,a(e: 100

<2. Whi!h of the follo%in( is not an in&e> of %ei(hte& avera(e pri!es? A$ COLA. *$ C,I. C$ 8', &eflator. '$ ,,I. Ans%er: A T"pe: *asi! +n&erstan&in( ,a(e: 100

,a(e 1<

Chapter 7: Inflation

<3. Cost6of6livin( a&@#st)ents: A$ /e&#!e the pri!e effe!t of inflation. *$ Allo% in&ivi&#als to )aintain their p#r!hasin( po%er &#rin( inflation. C$ Ca#se in&ivi&#als to shorten their ti)e hori4ons. '$ 9aintain !onstant real interest rates. Ans%er: * T"pe: Co)ple> +n&erstan&in( ,a(e: 100

<7. When inflation s#&&enl" in!reases1 A/9s: A$ ,rote!t a(ainst risin( real interest rates. *$ ,rote!t the p#r!hasin( po%er of %orCersA %a(es. C$ ,rote!t borro%ers a(ainst the effe!ts of inflation. '$ 9aintain a stable rate of real interest. Ans%er: ' T"pe: 'efinition ,a(e: 100

<=. The ob@e!tive of a&@#stable6rate )ort(a(es is to: A$ 9aintain a stable rate of real interest. *$ ,rote!t &ebtors fro) an #nanti!ipate& loss of real %ealth. C$ In!rease the (ap bet%een no)inal an& real in!o)es. '$ /e&#!e transfer pa")ents. Ans%er: A T"pe: Co)ple> +n&erstan&in( ,a(e: 100

<<. The real interest rate is: A$ The &ifferen!e bet%een the pri)e rate an& the rate !har(e& b" the (overn)ent ?Fe&eral /eserve$ on loans. *$ The no)inal interest rates )in#s the anti!ipate& rate of inflation. C$ The inflation rate )in#s the per!enta(e in!rease in avera(e %a(es. '$ The s#) of inflation rates an& #ne)plo")ent rates. Ans%er: * T"pe: 'efinition ,a(e: 100

. The real interest rate: A$ Is stabili4e& b" A/9s. *$ Is prote!te& b" COLAs. C$ *e!o)es lar(er %ith s#&&en !han(es in anti!ipate& inflation rates. '$ All of the above. Ans%er: A T"pe: 'efinition ,a(e: 100

1 1. The real interest rate is: A$ The no)inal interest rate )in#s the anti!ipate& rate of inflation. *$ Stabili4e& b" A/9s. C$ The inflation6a&@#ste& rate of interest. '$ All of the above.

,a(e .

Chapter 7: Inflation

Ans%er: ' T"pe: 'efinition ,a(e: 100

1 .. If the no)inal interest rate is 1. per!ent an& the inflation rate is < per!ent1 the real interest rate is: A$ 1. per!ent. *$ .1 per!ent. C$ - per!ent. '$ 6- per!ent. Ans%er: C T"pe: Anal"ti!al ,a(e: 100

1 -. If the no)inal interest rate is < per!ent an& the inflation rate is 1- per!ent1 the real interest rate is: A$ 60 per!ent. *$ 0 per!ent. C$ .. per!ent. '$ < per!ent. Ans%er: A T"pe: Anal"ti!al ,a(e: 100

1 0. If the no)inal interest rate is 2 per!ent an& the inflation rate is 2 per!ent1 the real interest rate is: A$ 2 per!ent. *$ 1 per!ent. C$ 62 per!ent. '$ per!ent. Ans%er: ' T"pe: Anal"ti!al ,a(e: 100

1 2. If the no)inal interest rate is 11 per!ent an& the real interest rate is 11 per!ent then: A$ The e>pe!te& rate of inflation is .. per!ent. C$ /eal 8', )#st e>!ee& no)inal 8', *$ The e>pe!te& rate of inflation is per!ent. '$ No)inal 8', )#st e>!ee& real 8',. Ans%er: * T"pe: Co)ple> +n&erstan&in( ,a(e: 100

+se the follo%in( to ans%er 5#estions 1 361 =: Figure 7.&

7 3
IN T 7 / 7 S T / A T 7 ?p e r! e n t p e r " e a r$

2 0 . 1

N o ) in a l in te re s t ra te

/ eal in te re s t ra te

1<7

1<72

1<=

1<=2
; 7A /

1<<

1<<2

1 3. +sin( Fi(#re 7.01 e>pe!te& inflation %as:

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Chapter 7: Inflation

A$ *$ C$ '$

8reater &#rin( the perio& fro) 1<7 to 1<72 than it %as &#rin( the perio& fro) 1<= to 1<=2. The sa)e in 1<7 an& 1<<2. 8reater in 1<7 than in 1<<2. 8reater &#rin( the perio& fro) 1<= to 1<=2 than it %as &#rin( the perio& fro) 1<7 to 1<72.

Ans%er: ' T"pe: Co)ple> +n&erstan&in( ,a(e: 100

1 7. For the e!ono)" represente& in Fi(#re 7.01 %hi!h of the follo%in( state)ents is &efinitel" tr#e? A$ Anti!ipate& inflation %as (reater than a!t#al inflation. *$ A!t#al inflation %as (reater than anti!ipate& inflation. C$ Inflation %as anti!ipate&. '$ Inflation o!!#rre&. Ans%er: ' T"pe: Co)ple> +n&erstan&in( ,a(e: 100

1 =. For the e!ono)" represente& in Fi(#re 7.01 if a!t#al inflation %as (reater than anti!ipate& inflation: A$ *orro%ers %o#l& e>perien!e an in!rease in real in!o)e. *$ Len&ers %o#l& e>perien!e an in!rease in real in!o)e. C$ All %orCers %o#l& e>perien!e a &e!rease in real in!o)e. '$ The %ealth effe!t %o#l& re&istrib#te p#r!hasin( po%er to people on fi>e& in!o)es. Ans%er: A T"pe: Co)ple> +n&erstan&in( ,a(e: 100

TH7 7CONO9; TO9O//OW

1 <. The )ost f#n&a)ental f#n!tion of pri!es in a )arCet e!ono)" is to provi&e: A$ The &ata ne!essar" to !al!#late rates of inflation. *$ The basis for the !al!#lation of sales ta>. C$ Infor)ation abo#t the relative s!ar!ities of reso#r!es an& (oo&s an& servi!es. '$ 9a>i)#) profits to pro&#!ers. Ans%er: C T"pe: *asi! +n&erstan&in( ,a(e: 103

11 . The )ost &esirable inflation rate is the rate that: A$ 75#als the offi!ial (oal of - per!ent. *$ Least effe!ts the behavior of !o)panies1 investors1 !ons#)ers an& %orCers. C$ 9a>i)i4es the D%ealth effe!tD of inflation '$ Coin!i&es %ith an #ne)plo")ent rate of 4ero per!ent. Ans%er: * T"pe: *asi! +n&erstan&in( ,a(e: 103

The follo%in( )#ltiple6!hoi!e 5#estions re5#ire !riti!al thinCin( abo#t In the News an& World View arti!les that appeare& in the te>t.

111. A!!or&in( to an In the News arti!le title& D,#bli! Colle(esA T#ition /ises 7.7H this Fall1D relative to other

,a(e ..

Chapter 7: Inflation

ho#sehol&s1 parents sen&in( st#&ents to !olle(e are )ost liCel" to e>perien!e a relative: A$ 'e!line in real in!o)e. C$ 'e!line in no)inal in!o)e. *$ /ise in real in!o)e. '$ /ise in no)inal in!o)e. Ans%er: A T"pe: Co)ple> +n&erstan&in( ,a(e: 1-1

,a(e .-

Chapter 7: Inflation

11.. A!!or&in( to an In the News arti!le title& D,#bli! Colle(esA T#ition /ises 7.7H this Fall1D relative to other parents1 parents of !olle(e6bo#n& st#&ents e>perien!e: A$ *oth a hi(her relative pri!e of t#itionAs an& fees an& a hi(her inflation rate. *$ A lo%er relative pri!e of t#itionAs an& fees an& a hi(her inflation rate. C$ A hi(her relative pri!e of t#itionAs an& fees an& a lo%er inflation rate. '$ *oth a lo%er relative pri!e of t#itionAs an& fees an& a lo%er inflation rate. Ans%er: A T"pe: Co)ple> +n&erstan&in( ,a(e: 1-1

11-. A!!or&in( to an In the News arti!le title& D,#bli! Colle(esA T#ition /ises 7.7H this Fall1D if #niversit" enroll)ents &o not fall1 then #niversities sho#l& e>perien!e: A$ *oth hi(her no)inal an& real in!o)e. C$ Lo%er no)inal in!o)e b#t hi(her real in!o)e. *$ Hi(her no)inal b#t lo%er real in!o)e. '$ *oth lo%er real an& no)inal in!o)e. Ans%er: A T"pe: Co)ple> +n&erstan&in( ,a(e: 1-1

110. The World View arti!le DWorl&%i&e InflationD (ives the inflation rates of vario#s !o#ntries. 9one" hel& in a savin(s a!!o#nt in !o#ntries %ith hi(h inflation ten&s to lose val#e. This is an e>a)ple of the: A$ ,ri!e effe!t of inflation. C$ Wealth effe!t of inflation. *$ In!o)e effe!t of inflation. '$ 9one" ill#sion. Ans%er: C T"pe: Co)ple> +n&erstan&in( ,a(e: 1-0

112. The World View arti!le DWorl&%i&e InflationD (ives the inflation rates of vario#s !o#ntries. Whi!h of the follo%in( is a )a!ro !onse5#en!e of inflation? A$ *ra!Cet !reep. *$ +n!ertaint". C$ Shortene& ti)e hori4ons. '$ All of the above. Ans%er: ' T"pe: Co)ple> +n&erstan&in( ,a(e: 1-3

113. A World View arti!le DWorl&%i&e InflationD (ives the inflation rates of vario#s !o#ntries. If no)inal in!o)es &o not Ceep pa!e %ith inflation1 the res#lt is referre& to as the: A$ ,ri!e effe!t of inflation. C$ Wealth effe!t of inflation. *$ In!o)e effe!t of inflation. '$ *ra!Cet !reep. Ans%er: * T"pe: 'efinition ,a(e: 1--

117. The World View arti!le DTortilla ,ri!e HiCe Hits 9e>i!oAs ,oorestD &es!ribes one effe!t of 9e>i!oAs inflation. ,eople %ho rel" on tortillas IJ for half their &ail" &ietK are liCel" to e>perien!e the: A$ ,ri!e effe!t of inflation. C$ Wealth effe!t of inflation. *$ In!o)e effe!t of inflation. '$ 9one" ill#sion. Ans%er: A T"pe: Co)ple> +n&erstan&in( ,a(e: 1-1

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Chapter 7: Inflation

True'False Questions

WHAT IS INFLATION?

F 11=. Inflation al%a"s o!!#rs %hen an in&e> of %ei(hte& avera(e pri!es rises. Ans%er: Tr#e T"pe: 'efinition ,a(e: 1-

F 11<. Inflation involves in!reases in spe!ifi! pri!es1 not relative pri!es or avera(e pri!es. Ans%er: False T"pe: 'efinition ,a(e: 1-

F 1. . 'eflation is a &e!rease in the avera(e level of pri!es1 not a &e!rease in an" spe!ifi! pri!e. Ans%er: Tr#e T"pe: 'efinition ,a(e: 1-

F 1.1. /elative pri!e !han(es are a &esirable an& essential in(re&ient of the )arCet )e!hanis). Ans%er: Tr#e T"pe: *asi! +n&erstan&in( ,a(e: 1-

F 1... When there is no &eflation an& no inflation1 there !an still be !han(es in relative pri!es. Ans%er: Tr#e T"pe: *asi! +n&erstan&in( ,a(e: 1-

/7ST/I*+TIB7 7FF7CTS

F 1.-. The re&istrib#tion of in!o)e is a )i!roe!ono)i! effe!t of inflation. Ans%er: Tr#e T"pe: *asi! +n&erstan&in( ,a(e: 1-1

F 1.0. 7ver"one is )a&e %orse off b" inflation. Ans%er: False T"pe: *asi! +n&erstan&in( ,a(e: 1-1

F 1.2. So)e b#"ers respon& to inflation b" !#ttin( ba!C on p#r!hases of (oo&s an& servi!es1 %hereas others respon& b" )aCin( (reater p#r!hases of (oo&s an& servi!es. Ans%er: Tr#e T"pe: *asi! +n&erstan&in( ,a(e: 1-1

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Chapter 7: Inflation

F 1.3. When resta#rant pri!es rise faster than pri!es of foo& at (ro!er" stores1 real in!o)e falls for people %ho visit resta#rants relative to those %ho !ooC for the)selves. Ans%er: Tr#e T"pe: Co)ple> +n&erstan&in( ,a(e: 1-1

F 1.7. When pri!es of )ovie ti!Cets rise faster than pri!es of !on!ert ti!Cets1 real in!o)e rises for people %ho (o to )ovies relative to those %ho (o to !on!erts. Ans%er: False T"pe: Co)ple> +n&erstan&in( ,a(e: 1-1

F 1.=. If "o#r real in!o)e rises b#t "o#r no)inal in!o)e falls1 then "o# benefit fro) &eflation. Ans%er: Tr#e T"pe: *asi! +n&erstan&in( ,a(e: 1-1

F 1.<. /eal in!o)e is the a)o#nt of )one" in!o)e re!eive& in a (iven ti)e perio&1 )eas#re& in !#rrent &ollars. Ans%er: False T"pe: 'efinition ,a(e: 1-1

F 1- . When a personAs real in!o)e falls in a perio& of inflation1 then the personAs no)inal in!o)e )#st fall. Ans%er: False T"pe: *asi! +n&erstan&in( ,a(e: 1-1

F 1-1. When a personAs no)inal in!o)e rises b#t his or her real in!o)e falls1 then avera(e pri!es have risen. Ans%er: Tr#e T"pe: *asi! +n&erstan&in( ,a(e: 1-1

F 1-.. /e&istrib#tion of %ealth is a )i!roe!ono)i! effe!t of inflation. Ans%er: Tr#e T"pe: *asi! +n&erstan&in( ,a(e: 1-1

F 1--. 9one" ill#sion res#lts fro) e>pe!tations base& on !#rrent no)inal in!o)e rather than real p#r!hasin( po%er. Ans%er: Tr#e T"pe: *asi! +n&erstan&in( ,a(e: 1-3

9AC/O CONS7E+7NC7S

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Chapter 7: Inflation

F 1-0. +n!ertaint" an& spe!#lation are )i!roe!ono)i! effe!ts of inflation. Ans%er: False T"pe: *asi! +n&erstan&in( ,a(e: 1-3

F 1-2. ,ro&#!tion repla!es spe!#lation &#rin( a perio& of h"perinflation. Ans%er: False T"pe: *asi! +n&erstan&in( ,a(e: 1-7

F 1-3. The #n&esirable effe!ts of bra!Cet !reep !an be eli)inate& b" in&e>in( )ar(inal ta> rates. Ans%er: Tr#e T"pe: *asi! +n&erstan&in( ,a(e: 1-7

97AS+/IN8 INFLATION

F 1-7. The C,I1 in the lon( r#n1 #s#all" in&i!ates a hi(her inflation rate than the ,,I. Ans%er: False T"pe: *asi! +n&erstan&in( ,a(e: 1-=

F 1-=. The 8', &eflator is the onl" o#tp#t in&e> base& on a fi>e& )arCet basCet thro#(h ti)e. Ans%er: False T"pe: *asi! +n&erstan&in( ,a(e: 10

TH7 8OAL: ,/IC7 STA*ILIT;

F 1-<. ,ri!e stabilit" is a )a@or (oal of e!ono)i! poli!". Ans%er: Tr#e T"pe: *asi! +n&erstan&in( ,a(e: 10

F 10 . In or&er to a!hieve pri!e stabilit"1 inflation )#st be 4ero. Ans%er: False T"pe: *asi! +n&erstan&in( ,a(e: 10

F 101. The (oal of pri!e stabilit" %as first establishe& as p#bli! poli!" in the F#ll 7)plo")ent an& *alan!e& 8ro%th A!t of 1<7=. Ans%er: Tr#e T"pe: *asi! +n&erstan&in( ,a(e: 10

F 10.. A (oal of - per!ent inflation allo%s for 5#alit" i)prove)ents. Ans%er: Tr#e T"pe: *asi! +n&erstan&in( ,a(e: 101

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Chapter 7: Inflation

TH7 HISTO/ICAL /7CO/'

F 10-. On avera(e1 +.S. inflation rates have been lo%er than the rates in )ost other !o#ntries. Ans%er: Tr#e T"pe: *asi! +n&erstan&in( ,a(e: 10.

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Chapter 7: Inflation

F 100. The +nite& States has e>perien!e& perio&s of inflation1 b#t it has never e>perien!e& perio&s of &eflation. Ans%er: False T"pe: *asi! +n&erstan&in( ,a(e: 10.

CA+S7S OF INFLATION

F 102. 'e)an&6p#ll inflation is the res#lt of e>!essive press#re on the &e)an& si&e of the e!ono)". Ans%er: Tr#e T"pe: *asi! +n&erstan&in( ,a(e: 100

F 103. Cost6p#sh inflation is the res#lt of !ons#)ers tr"in( to a!5#ire )ore (oo&s. Ans%er: False T"pe: *asi! +n&erstan&in( ,a(e: 100

,/OT7CTIB7 97CHANIS9S

F 107. The real interest rate is stabili4e& b" A/9s. Ans%er: Tr#e T"pe: *asi! +n&erstan&in( ,a(e: 100

F 10=. The real interest rate is the rate of inflation )in#s the no)inal interest rate. Ans%er: False T"pe: *asi! +n&erstan&in( ,a(e: 100

,a(e .<