ECON 1115 Chapter 7 homework

Which of the following is true in an economy with a high and rising rate of inflation? a) People on fixed incomes are helped b) Lenders who anticipated the inflation are hurt c) Borrowers are hurt d) More resources are devoted to money management

d) More resources are devoted to money management One certainty is that in periods of variable inflation, more resources will be devoted to accurately forecasting the rate of inflation.

Rising per-unit production costs are most directly associated with a) frictional unemployment. b) structural unemployment. c) demand-pull inflation. d) cost-push inflation.

d) cost-push inflation.

A person's real income will increase by 3% if her nominal income a) increases by 2% while the price index falls by 5%. b) increases by 5% while the price index falls by 2%. c) increases by 2% while the price index rises by 5%. d) increases by 5% while the price index rises by 2%.

d) increases by 5% while the price index rises by 2%. 5 (income) - 2 (price index) = 3

The annual rate of inflation can be found by subtracting a) the real income from the nominal income. b) last year's price index from this year's price index. c) this year's price index from last year's price index and dividing the difference by this year's price index. d) last year's price index from this year's price index and dividing the difference by last year's price index.

d) last year's price index from this year's price index and dividing the difference by last year's price index.

Unanticipated inflation a) hurts borrowers and helps lenders. b) helps savers. c) hurts people whose sole source of income is from Social Security benefits. d) reduces the real burden of the public debt to the federal government.

d) reduces the real burden of the public debt to the federal government.

The CPI and the inflation rate are calculated each month by a) the bureau of economic analysis. b) the national bureau of economic research. c) the Federal Reserve Bank. d) the bureau of labor statistics.

d) the bureau of labor statistics.

If the Consumer Price Index for one year was 124.0 and for the next year was 130.7, what was the approximate rate of inflation? a) 5.4% b) 24.0% c) 30.7% d) 130.7%

a) 5.4%

Unanticipated inflation helps some groups in the economy. a) True b) False

a) True

In what circumstances would lenders most benefit? a) When there is an unanticipated decrease in inflation. b) When there is an anticipated decrease in inflation c) When there is an anticipated increase in inflation. d) When there is an unanticipated increase in inflation.

a) When there is an unanticipated decrease in inflation.

Inflation is undesirable because it a) arbitrarily redistributes real income and wealth. b) reduces everyone's standard of living. c) invariably leads to hyperinflation. d) usually is accompanied by declining real GDP.

a) arbitrarily redistributes real income and wealth.

Currently the Federal Reserve Bank is raising interest rates because a) it fears that inflation is possible. b) it wants to increase employment which occurs when interest rates rise. c) it wants to reduce government borrowing because of the size of the national debt. d) all of the above are reasons why the Fed recently raised interest rates.

a) it fears that inflation is possible.

Cost-push inflation a) reduces real output. b) increases real output. c) reduces the unemployment rate. d) raises the natural rate of unemployment.

a) reduces real output.

The inflation rate between any two years is calculated as (choose all that apply) a) the percentage change in the CPI from one year to the next. b) (CPI in year 2 - CPI in year 1) / CPI in the base year X 100. c) (CPI in year 2 - CPI in year 1) / CPI in year 1 X 100. d) (CPI in year 2 - CPI in the base year) / CPI in the base year X 100.

a) the percentage change in the CPI from one year to the next. c) (CPI in year 2 - CPI in year 1) / CPI in year 1 X 100. d) (CPI in year 2 - CPI in the base year) / CPI in the base year X 100.

The CPI is calculated as a) the ratio of the current dollar value of a basket of goods to the constant dollar value of the same basket X 100. b) the ratio of the current dollar value of a basket of goods to the constant dollar value of the same basket. c) the ratio of the constant dollar value of a basket of goods to the current dollar value of the same basket X 100. d) the ratio of the constant dollar value of a basket of goods to the current dollar value of the same basket.

a) the ratio of the current dollar value of a basket of goods to the constant dollar value of the same basket X 100.

Cost-push inflation may be caused by a) a decline in per unit production costs. b) a decrease in wage rates. c) a decrease in resource availability. d) all of the above.

c) a decrease in resource availability.

A lender need not be penalized by inflation if the a) long-term rate of inflation is less than the short-term rate of inflation. b) short-term rate of inflation is less than the long-term rate of inflation. c) lender correctly anticipates inflation and increases the nominal interest rate accordingly. d) inflation is unanticipated by both borrower and lender.

c) lender correctly anticipates inflation and increases the nominal interest rate accordingly.

Demand-pull inflation a) can be present even during an economic depression. b) is also called "hyperinflation." c) occurs when total spending in the economy is excessive. d) none of the above.

c) occurs when total spending in the economy is excessive.

If the Consumer Price Index for one year was 150.0 and the rate of inflation from that year to the next was 10 percent, what would be the Consumer Price Index in the second year? a) 110.0 b) 140.0 c) 160.0 d) 165.0

d) 165.0

When oil and energy prices rise, the economy tends to experience a) Unanticipated inflation. b) Natural inflation. c) Demand-pull inflation. d) Cost-push inflation.

d) Cost-push inflation.

Which of the following best describes the true costs of inflation? a) Real wages are lowered b) Lenders are hurt c) The economy produces less than it otherwise would d) None of the above

c) The economy produces less than it otherwise would

Who is least likely to be hurt by unanticipated inflation? a) A secretary. b) An owner of a small business. c) A disabled laborer who is living off accumulated savings. d) A pensioned steelworker.

b) An owner of a small business.

A price index that is used to measure inflation will do which of the following? a) Hold prices constant b) Hold quantities constant c) Hold neither prices or quantities constant d) Hold both prices and quantities constant

b) Hold quantities constant A price index takes a given market basket and compares the price levels of goods and services in that market basket between two periods. In other words, it holds the quantities constant.

Inflation initiated by increases in wages or other resource prices is labeled a) cost-pull inflation. b) cost-push inflation. c) demand-pull inflation. d) demand-push inflation.

b) cost-push inflation.

When inflation occurs a) each dollar of income will buy more output than before. b) the purchasing power of money decreases. c) the purchasing power of money increases. d) all prices are rising.

b) the purchasing power of money decreases.

If the Consumer Price Index for a certain year is 103, this means that the average price of consumer items in that year was a) 3% higher than the average price of the preceding year. b) 103% higher than the average price in the base year. c) 3% higher than the average price in the base year. d) $103 higher per basket of consumer goods and services.

c) 3% higher than the average price in the base year.

Which of the following is a correct statement? a) It is relatively easy to distinguish between cost-push and demand-pull inflation even if you don't know the source of the inflation b) A supply shock will cause a variation of demand-pull inflation that can lead to hyperinflation c) Demand-pull inflation will continue as long as there is excess total spending in the economy d) Demand-pull inflation is usually accompanied by higher unemployment rates

c) Demand-pull inflation will continue as long as there is excess total spending in the economy

Assume that there is a fixed rate of interest on contracts for borrowers and lenders. If unanticipated inflation occurs in the economy, then a) Borrowers are hurt, but lenders benefit. b) Both lenders and borrowers are hurt. c) Lenders are hurt, but borrowers benefit. d) Both lenders and borrowers benefit.

c) Lenders are hurt, but borrowers benefit.

Inflation is a rise in a) Unemployment over time. b) Real GDP over time. c) The general level of prices over time. d) The standard of living over time.

c) The general level of prices over time.