CH 7 Study Lesson

_________ 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 __________ _________.

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

Income that is received as wages and is not adjusted for inflation is called ______ income.

nominal

The real rate of interest is the _____________ rate of interest minus the anticipated rate of inflation.

nominal

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

lower

Suppose tuition is $10,000 for the academic year 2017-2018. Assume the cost of tuition is rising at 5% each year (annual inflation rate = 5%). What is the cost of tuition for 2018-2019?

$10,500

Suppose tuition is $5,000 for the academic year 2020-2021. Assume the cost of tuition is rising at 5 percent each year (annual inflation rate = 5%). What is the cost of tuition for 2021-2022?

$5,250 Reason: = (cost of tuition in start year)x(1 + inflation) = ($5,000)x(1 + 0.05) = $5,250

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% Reason: The real rate of interest is equal to the nominal interest rate minus the rate of inflation. In this case, 7% - 5% equals 2%.

Hyperinflation is an inflation rate in excess of _____ percent, lasting at least one year.

200

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%

Suppose the CPI was 120 last year and is 130 this year. The 1-year inflation rate equals _____.

8.3% Reason: = (CPI this year - CPI last year) / (CPI last year)

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

85

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

COLA

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

CPI (Consumer price index)

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

False Reason: The CPI only measures changes in price.

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

The _________ price index is usually expressed in terms of what a representative market basket of goods costs consumers.

consumer

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

PPI

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

True Reason: Because some new products didn't exist when the basket of goods was created, these omissions impact the accuracy of the CPI.

The most notable recent episode of hyperinflation occurred in

Zimbabwe

Deflation occurs when there is:

a decreasing average price level

The formula for the _________ ____________ ___________ 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

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

accounts for prices changes

The macro consequences of a falling price level

are similar to those occurring with a rising price level.

Cost-of-living adjustments are ______.

automatic wage changes that happen when the CPI rises

For consumers who enjoy meat, information about the cost of a typical basket of meat will be useful. This idea of a "typical" basket is conveyed by the basket's _____ price.

average

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

cost-push inflation Reason: The skyrocketing prices of oil are good examples of cost-push inflation originating on the supply side.

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

demand-pull

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

different (PPI increase before the CPI)

Demand-pull inflation is caused by

excess total spending

During hyperinflation, the value of money:

falls rapidly

True or false: Inflation always makes people worse off.

false

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

families

During the 1800s the U.S. price level _____ declined.

frequently

Real income will be affected:

if the change in price level differs from the change in a person's nominal income.

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

__________ is an increase in the average level of prices of goods and services.

inflation

___________ redistributes total real income

inflation

Economists believe there may be a trade-off between

inflation and unemployment

The challenge for the economy tomorrow is to find the ___________ inflation rate.

optimal

The most visible consequence of inflation is _____ changes.

price

Deflation is a great economic problem because:

prices and wages fall but debts remain the same

Inflation refers to ______.

the change in the average level of prices

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

the inflation rate

Over long periods of time, the CPI and PPI generally reflect ______ rates of inflation.

the same

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

uncertain

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

price stability

The following table contains data for the country of Inflationland. Year 2000 2010 Nominal GDP $10 Trillion $15 Trillion GDP deflator 80 105 The 2010 real GDP using 2000 prices is ______. (NOTE: 2010 is the target year and 2000 is the reference year which differs from the base year.)

$11.43 trillion Reason: (Real GDP for target year) = [(Nominal GDP for target year)/(GDP deflator)]×GDP deflator for reference year $11.43t = [$15t/105]×80

The following table contains data for the country of Inflationland. Year 2000 2010 Nominal GDP $10 Trillion $15 Trillion GDP deflator 80 105 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 Reason: (Real GDP for target year) = [(Nominal GDP for target year)/(GDP deflator)]×GDP deflator for reference year $13.125t = [$10t/80]×105

Suppose you have a wage contract stipulating you get $20,000 annual nominal income starting this year (year 1). Assume inflation is 5%. What is the real value of your wages next year (year 2)?

$19,048 Reason: = (nominal income)/(1+inflation rate), compounded annually = $20,000/(1 + .05) = $19,048

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 Reason: = (nominal income)/(1+inflation rate), compounded annually = $50,000/(1 + .03) = $48,544

Which statement best describes how an increase in nominal income and a decrease in real income might occur simultaneously?

A person is a flexible-income earner and a holder of financial assets.

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

ARM

Based on the redistributive income effects of inflation, who "gains" when there is inflation? Select all that apply. Multiple select question. Kenzie, who has a salary that increases at twice the rate of inflation Marco, who has a 5-year wage contract specifying constant wages Colonial First Bank, which only gives loans whose interest rate increases when inflation increases Grandma JoJo, who lives on her fixed pension Locality Bank, which has many loans at a fixed interest rate

Kenzie, who has a salary that increases at twice the rate of inflation Colonial First Bank, which only gives loans whose interest rate increases when inflation increases

What are the basic lessons learned about the redistributive effects of price changes? multiple Not everyone suffers equally from inflation. All prices rise at the same rate during an inflation. Not all prices rise at the same rate during an inflation. Everyone suffers equally from inflation.

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

Which of the following are the three redistributive effects of inflation? Wealth effects Income effects Production effects Price effects Consumption effects

Price effects Income effects Wealth effects

Multiple Select Question Select all that apply Which of the following result from the redistributive effects of inflation? Select all that apply. Social and economic tensions Money illusion Uncertainty Unemployment A trade deficit

Social and economic tensions Money illusion Uncertainty

Inflation is an increase in the ______________ level of prices.

average

Knowing the price of each kind of meat (beef, pork, poultry) would enable one to compute the _____ price of meat.

average

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

bracket creep

It is believed that expectations of rising prices _____ more spending.

can encourage

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

cost-push

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 all consumers equally

lenders with fixed interest rate loans fixed income groups

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

lower than

_______ income is the money you receive in a particular time period measured in current dollars.

nominal

The formula for real GDP is:

nominal GDP divided by GDP deflator times 100

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

nominal; real

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

often change, creating temporary changes in prices

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

In the United States deflation is

rare.

When income is adjusted for the purchasing power of money, it is called ______ income

real

__________ 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

real GDP

Income that has been adjusted for changes in prices over time is called:

real income

Because of its __________ effects, inflation increases social and economic tensions

redistributive

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

redistributive

In recent years the impact of bracket creep has been limited by the Multiple select question. reduction in the number of tax brackets. widespread practice of tax evasion. indexing of personal tax rates.

reduction in the number of tax brackets. indexing of personal tax rates.

The price of one good in comparison with the price of other goods is a ______ price

relative

The effect of a specific price change on the inflation rate depends on the product's

relative importance in consumer budgets.

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

relatively better off than

If you consume goods and services whose prices are rising faster than inflation, compared to the average person, you are:

relatively worse off

With an adjustable rate mortgage, if the rate of inflation jumps, then the nominal rate on the mortgage will

rise

If Lanita's nominal income increases by 10% and the price level increases by 6%, her real income will:

rise by 4%

Suppose Homer's nominal income has not changed in the past year while 3% deflation has occurred in the economy. In this instance, Homer's real income has

risen by 3%.

If relative prices are changing, we can definitely state that ______.

some prices may be rising and some may be falling

Relative price changes are important ______. to determine the price of one good in comparison with the price of other goods to the market mechanism to determine the preferred method of national income accounting to determine leisure activities

to determine the price of one good in comparison with the price of other goods to the market mechanism

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

true Reason: By stripping volatile food and energy prices, policymakers isolate so-called core inflation, the underlying increases in the CPI.

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

true Reason: Tensions between labor and management, between government and the people, and among consumers may overwhelm a society and its institutions.

A restraint in government spending to maintain price stability may result in _______________ (unemployment/inflation).

umemployment

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

uncertainty about future costs.

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

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