Chapter 7 Macroeconomics

The 2010 real GDP using 2000 prices is _______. (NOTE: 2010 is the target year and 2000 is the reference year rather than the base year.) Multiple choice question.

$11.43 trillion

The 2000 real GDP using 2010 prices is ______. (NOTE: 2000 is the target year and 2010 is the reference year which differs from the base year.)

$13.125 trillion

Suppose you have a wage contract stipulating you get $50,000 annual nominal income starting this year (year 1). Assume inflation is 3%. What is the real value of your wages in two years (year 3)? Multiple choice question.

$47,130

Suppose you have a wage contract stipulating you get $50,000 annual nominal income starting this year (year 1). Assume inflation is 3%. The real value of your wages in the next year (year 2) is

$48,544

The 2010 real GDP using base year prices is $

14.3

If real economic growth is 3%, the inflation rate is 5%, and the nominal interest rate is 7%, then the real rate of interest is

2%

The Full Employment and Balanced Growth Act of 1978 established a goal for price stability to be an inflation rate less than

3

If the nominal interest rate is 9% and the anticipated inflation rate is 4 percent, what is the real interest rate?

5 percent

The construction of the CPI relies on prices collected in ______ cities across the United States.

85

A mortgage that adjusts the nominal interest rate to changing rates of inflation is known as a(an)

ARM

Market participants can protect themselves from inflation by indexing their nominal incomes through the use of

COLAs.

The measure of changes in the average price of consumer goods and services is known as the: Multiple choice question.

CPI

A price index that refers to all goods and services included in GDP is the

GDP deflator.

Cost-push inflation is caused by:

Increased production costs

redistributes total real income

Inflation

GDP uses current prices. GDP uses prices adjusted for inflation.

Nominal Real

The formula for real GDP is:

Nominal GDPGDP deflatorNominal GDPGDP deflator×100

What are the basic lessons learned about the redistributive effects of price changes?

Not everyone suffers equally from inflation. Not all prices rise at the same rate during an inflation.

Which of the following tracks the average prices received by producers?

PPI

The most visible consequence of inflation is _____ changes.

Price

Because of its (enter one word in the blank) effects, inflation increases social and economic tensions.

Redistributive

True or false: Because of its redistributive effects, inflation increases social and economic tensions. True false question.

True

True or false: Core inflation excludes volatile prices of goods like food and energy.

True

True or false: Deflation reverses the redistributions caused by inflation. True false question.

True

True or false: Hyperinflation is extraordinarily rapid inflation. True false question.

True

True or false: The omission of new products such as cellular phones causes the CPI to overstate the rate of inflation. True false question.

True

Real gross domestic product (GDP) is a measure of GDP that

accounts for prices changes

The movement of taxpayers into higher tax rates as nominal incomes grow is called:

bracket creep

When a worker's nominal income increases, thereby, moving him into a higher tax bracket, the worker experiences

bracket creep

price index measures the changes in the average price of consumer goods and services.

consumer

The formula for the (enter a full word in each blank, not a single letter) is the cost of the most recent market basket in the particular year divided by the cost estimate of the market basket in the base year multiplied by 100.

consumer price index (CPI)

Social security payments automatically increase when the CPI goes up because of the

cost of living adjustments

Inflation caused by an increase in the per-unit production costs at each level of total spending is called

cost-push

Inflation caused by an increase in the per-unit production costs at each level of total spending is called: Multiple choice question.

cost-push

The rocketing prices of imported oil in 1973-1974 and again in 1979-1980 are good illustrations of

cost-push

The rocketing prices of imported oil in 1973-1974 and again in 1979-1980 are good illustrations of

cost-push inflation

Too much spending chasing too few goods is the essence of - inflation.

demand pull

Inflation caused by an excess of total spending beyond the economy's capacity to produce is called

demand-pull inflation

In the short run, the CPI and PPI generally reflect ______ rates of inflation. Multiple choice question.

different (PPI increases before the CPI)

True or false: Changes in the CPI reflect changes in price as well as changes in quality.

false

The market basket of goods and services upon which the CPI is based is determined from annual surveys of

families.

If the CPI in a given year is recorded as 208, then we can say that the price of the market basket of items purchased by the typical consumer

has more than doubled since the base year

The idea that people whose nominal incomes rise more slowly than the rate of inflation end up worse off is called the:

income effect

If the price of housing increases drastically (a relatively important good in the CPI market basket), then the CPI _____.

increases by a large amount

If the price of flip-flops increases dramatically (a relatively unimportant good in the CPI market basket), then the CPI

increases negligibly

The _______ rate reflects the extent to which prices increase.

inflation

Economists believe there may be a trade-off between

inflation and unemployment

Real interest rates are the

interest rates quoted in the market minus the anticipated inflation rate

The redistributive effect of inflation impacts

lenders with fixed interest rate loans fixed income groups

The inflation rate as measured by the GDP deflator tends to be _____ the rate given by the CPI.

lower

Since 1980 the annual inflation rates in the United States have been _____ the rates experienced in most other countries. Multiple choice question.

lower than

illusion refers to the use of nominal income rather than real income to gauge changes in wealth.

money

Rising prices make people feel worse off even if their real income has not fallen. This is an example of. (Enter one word in each blank.)

money illusion

(New/Old) products are often slow to be included in the CPI, and when omitted tend to cause the CPI to be overstated.

new

When the anticipated rate of inflation is added to the real interest rate, the result is called the

nominal interest rate

Food and energy prices often complicate the measurement of inflation because supply and demand for these products

often change, creating temporary changes in prices

The absence of significant changes in the average price level, officially defined as a rate of inflation of less than 3 percent, is the United States goal of Multiple choice question.

price stability

Deflation is a great economic problem because:

prices and wages fall but debts remain the same

Cost-push inflation can originate on the supply side when

production facilities are destroyed

In general, the CPI only monitors the price of goods over time. It usually does not adjust for changes in the of the goods.

quality

BLANK income will be affected if the change in the price level differs from the change in a person's nominal income.

real

Nominal GDP divided by price index (in hundredths) equals:

real GDP

The value of final output produced in a given period, adjusted for changing prices is Multiple choice question.

real GDP

Inflation redistributes

real income

If you consume goods and services whose prices are rising slower than inflation, compared to the average person, you are: Multiple choice question.

relatively better off

If you hold your wealth in assets that are increasing in value slower than the rate of inflation, you are _______ those who hold assets that are increasing in value at the rate of inflation.

relatively worse off than

If you hold your wealth in assets that are increasing in value slower than the rate of inflation, you are _______ those who hold assets that are increasing in value at the rate of inflation. Multiple choice question.

relatively worse off than

With an adjustable rate mortgage, if the rate of inflation jumps, then the nominal rate on the mortgage will Multiple choice question.

rise.

Hyperinflation is often fueled by as spending accelerates and production declines. (Insert a single word.)

speculation

The annual percentage rate of increase in the average price level is called

the inflation rate

As average price levels change, economic decision-making becomes more:

uncertain

If price levels are rising rapidly and erratically, you may not commit to long term commitments because of Multiple choice question.

uncertainty about future costs.

A restraint in government spending to maintain price stability may result in

unemployment

The performance of inflation in the U.S. since 1800 has been very Multiple choice question.

uneven.

If due to inflation the real value of your savings makes you worse off than you were before, this is an example of the _________ effect. (Enter one word in the blank.)

wealth

The redistributive effect of inflation on income and wealth is composed of the:

wealth effect price effect income effect