Chapter 7

If a bank has already lent money at fixed interest rates, then during a period of higher-than-expected inflation, it experiences

A. Negative real income effects. B. Hyperinflation. C. Rising real interest rates. D. Deflation.

Real income is

A. Nominal income adjusted for inflation. B. The amount of money income received in a given time period, measured in current dollars. C. The use of nominal dollars to gauge changes in income. D. None of the other choices.

Based on Table 7.1, the rate of inflation between 2002 and 2003 using the CPI was

A. 1.45 percent. B. 2.2 percent. C. 6.2 percent. D. 4.1 percent.

If the CPI increases from 250 to 275 for one year, the rate of inflation for that year is

A. 13 percent B. 10 percent. C. 25 percent. D. 15 percent.

If the nominal interest rate is 13 percent and the anticipated rate of inflation is 8 percent, the real interest rate is

A. 13 percent. B. 21 percent. C. 5 percent. D. -5 percent.

The Consumer Price Index is

A. A measure of changes in the average price of all goods and services. B. A measure of changes in the average price of consumer goods and services. C. Used to measure the impact of business speculation on consumers. D. The impact felt by consumers who move into a higher tax bracket because of inflation.

The inflation rate is the

A. Monthly percentage rate increase in the price of all goods and services. B. Annual percentage rate increase in tax brackets. C. Annual percentage rate increase in the average price level. D. Monthly adjustment of wages to the cost of living.

A COLA is

A. A mortgage that adjusts the nominal interest rate to changing rates of inflation. B. A price index that refers to all goods and services included in GDP. C. An automatic adjustment of nominal income to the rate of inflation. D. An inflation rate of at least 200 percent, lasting more than one year.

Inflation is

A. A rise in the price of every good but not any service. B. An increase in relative prices of all goods and services. C. A situation in which purchasing power increases. D. An increase in the average level of prices of goods and services.

All of the following push a country inside its production possibilities curve except

A. A sudden burst of inflation that has not been anticipated. B. A sudden burst of deflation that has not been anticipated. C. The withholding of resources from the production process because of speculation. D. An increase in labor force participation.

A mortgage that adjusts the nominal interest rate to changing rates of inflation is

A. An ARM. B. A PPI. C. A GDM. D. A COLA.

For the economy represented in Figure 7.4, which of the following statements is definitely true?

A. Anticipated inflation was greater than actual inflation. B. Actual inflation was greater than anticipated inflation. C. Inflation was anticipated. D. Inflation occurred.

Which of the following groups is protected from a sudden increase in inflation?

A. Borrowers who have loans at fixed interest rates. B. Fixed-income groups. C. Workers who receive fixed wages under multiyear contracts. D. People who rent their homes under short-term leases in comparison with those who own their homes.

In the Full Employment and Balanced Growth Act of 1978,

A. Congress set an inflation goal of no more than 3 percent. B. The president set an inflation goal of 0 percent. C. Alan Greenspan set an inflation goal of 0 percent. D. An unemployment goal of 4 percent was set, but no inflation goal could be set.

The uncertainty that results from inflation causes changes in

A. Consumption, saving, and investment behavior. B. Saving and investment behavior, but not consumption. C. Consumption, but not saving and investment behavior. D. Income, but not consumption.

If OPEC raises the price of oil and production costs increase, this may cause

A. Cost-push inflation. B. Demand-pull inflation. C. Hyperinflation. D. Super-pull inflation.

If your nominal income remains constant at $3,000 while the price of an important product in your budget, such as cell phone service, rises from $50 to $100, your real income has

A. Decreased by $50. B. Decreased by $100. C. Decreased by $150. D. Remained constant.

Which of the following results from unexpected increases in the rate of inflation?

A. Decreased uncertainty. B. Increased windfall profits to creditors who have lent large amounts of money. C. Redistributions of income and wealth between different groups. D. Creditors are made better off.

The most desirable inflation rate is the rate that

A. Equals the official goal of 3 percent. B. Has the least effect on the behavior of companies, investors, consumers, and workers. C. Maximizes the "wealth effect" of inflation. D. Coincides with an unemployment rate of 0 percent.

To construct the Consumer Price Index, the Bureau of Labor Statistics must

A. Find out what people buy with their incomes and how the prices of what they buy change. B. Find out why people buy, what they buy, and how the prices of what they buy change. C. Find out what is in the typical consumer market basket on the basis of what producers produce. D. Conduct producer surveys to determine how much prices rise.

Which of the following is a likely macroeconomic consequence of inflation?

A. Focus on long-term planning. B. Speculation. C. Antitrust issues. D. None of the other choices.

Assume the CPI increases from 110 to 121, and Manny's nominal income increases from $100,000 to $120,000 over the same period. Manny's real income has

A. Increased by 12 percent. B. Increased by 10 percent. C. Decreased by 8 percent. D. Remained the same.

If the price of your cell phone service increases from $70 to $105 over a period of one year and your income rises from $1,500 to $1,525, your nominal income has

A. Increased, and your real income has increased. B. Increased, but your real income has decreased. C. Decreased, and your real income has decreased. D. Increased, but your real income has remained the same.

If your rent increases from $1,000 to $1,100 over a period of one year and your income rises from $6,000 to $7,000, your nominal income has

A. Increased, but your real income has decreased. B. Increased, and your real income has increased. C. Decreased, and your real income has decreased. D. Increased, but your real income has remained the same.

All of the following are true of the real interest rate except it

A. Is equal to the nominal interest rate minus the anticipated rate of inflation. B. Is stabilized by ARMs. C. Is the inflation-adjusted rate of interest. D. Equals the foreign exchange rate minus the inflation rate.

A friend tells you that his income has risen every year by 5 percent. At the same time, prices, on average, have risen by 5 percent. Your friend claims he is better off. Your friend

A. Is experiencing money illusion. B. Really is better off as he suggests. C. Has experienced an increase in nominal and real income. D. Has experienced an increase in real income only.

Which of the following is not true about your nominal income?

A. It is the amount of money you receive during a given time period. B. It is measured in current dollars. C. It is not an accurate measure of purchasing power. D. It is the same as your real income in times of high inflation.

When natural disasters, such as hurricanes on the U.S. Gulf Coast or an earthquake in Japan, disrupt supply chains and push up the costs of production, this may result in

A. Labor-push inflation. B. Demand-pull inflation. C. Wage-pull inflation. D. Cost-push inflation.

The term "nominal income" refers to

A. Money income adjusted for any change in the price level. B. Real purchasing power. C. Real purchasing power deflated for rising prices. D. Money income measured in current dollars.

Speculation during periods of inflation can result in all of the following except

A. People buying resources for resale later, rather than using the resources for current production. B. A movement inside the production possibilities curve. C. People buying gold, silver, jewelry, and the like instead of capital for production. D. More resources going into the production process.

Which of the following is a macro consequence of a sudden increase in the average level of prices?

A. People on fixed incomes suffer. B. Uncertainty is greater. C. Nominal income falls by a smaller percentage than real income. D. People lengthen their time horizons.

Generally speaking, which of the following groups would tend to gain real income from the wealth effects of inflation?

A. People with fixed income. B. People who have passbook savings accounts at fixed rates of interest. C. People who own assets that are appreciating faster than the inflation rate. D. People who hold all of their assets in the form of cash.

Which one of the following statements about the United States is true?

A. Prior to World War II, the United States experienced periods of both deflation and inflation. B. The United States has experienced inflation virtually every year since 1800. C. Since World War II, the United States has experienced deflation. D. Prior to World War II, the United States experienced deflation virtually every year; since World War II, the United States has consistently experienced inflation.

According to Figure 7.1, which of the following statements was definitely true about Country B?

A. Relative prices were changing. B. The price level in general increased over the time period 1970 to 1995. C. Real incomes were increasing. D. The price level was about the same in 1970 and 1995.

If the price of iPods rises 10 percent during a year when the level of average prices rises 3 percent, the relative price of iPods compared with other goods

A. Remains constant. B. Increases. C. Decreases. D. More information is required to answer this question.

Which of the following explains why redistribution occurs during inflation?

A. Rising prices fail to signal desirable changes in the mix of output. B. Because all prices do not change at the same rate, people buy different combinations of goods and services and own different combinations of wealth. C. Relative prices remain unchanged. D. All loans are indexed to inflation.

All of the following statements about inflation in the United States are correct except

A. Since the Great Depression, average prices have risen almost every year. B. The inflation rate was 13.5 percent in 1980. C. Prior to World War II, the United States experienced periods of both deflation and inflation. D. Inflation was at its worst during the Great Depression.

Inflation means

A. Specific prices are rising, and relative prices are falling. B. Both relative prices and average prices are rising. C. Relative prices are rising, but it is not certain what is happening to average prices. D. Average prices are rising, but it is not certain what is happening to relative prices.

Which of the following is often watched closely as a clue to potential changes in consumer prices in the future?

A. The CPI. B. The PPI. C. The GDP deflator. D. The COLAs.

If you were interested in charting prices of resources used by producers of energy, which of the following would you use?

A. The Producer Price Index (PPI). B. The Consumer Price Index (CPI). C. The GDP deflator. D. The Cost of Living Adjustment (COLA).

The real interest rate is

A. The difference between the prime rate and the rate charged by the government (the Federal Reserve) on loans. B. The nominal interest rate minus the anticipated rate of inflation. C. The inflation rate minus the percentage increase in average wages. D. The sum of inflation rates and unemployment rates.

An inflation goal set at a low rate but greater than zero allows all of the following except

A. The economy to achieve both full employment and price stability at the same time. B. For errors because of new products. C. For price increases caused by quality improvements. D. The Fed to meet less often.

If the nominal interest rate is 10 percent and the real interest rate is 6 percent,

A. The expected rate of inflation is 4 percent. B. The expected rate of inflation is 6 percent. C. Real GDP must exceed nominal GDP. D. Nominal GDP equals real GDP.

During a period of deflation,

A. The price level rises. B. People on fixed incomes are better off. C. People who hold cash are worse off. D. Lenders are worse off.

Relative price is

A. The price of one good in comparison with the price of other goods. B. A decrease in purchasing power because of rising prices. C. The amount of income a particular good requires. D. The current price paid for a good or service.

The base period used in computing a price index is

A. The year in which prices were at their lowest level. B. The year in which prices were at their average level. C. A fixed reference year from which meaningful comparisons can be made. D. The earliest year for which data are available.

All of the following are detrimental macro consequences of inflation except

A. Uncertainty. B. Speculation. C. Bracket creep. D. COLAs.

If the CPI doesn't measure product quality improvements, the CPI tends to

A. Understate the inflation rate. B. Overstate the inflation rate. C. Understate economic growth. D. Be artificially low.

Real GDP is the

A. Value of final output produced, adjusted for changing prices. B. Value of final output produced, measured in current prices. C. Income earned by current factors of production. D. GDP minus depreciation.

Inflation ________________ the purchasing power of money.

A. increases B. decreases C. does not affect D. stabilizes