ECON1115 Chapter 9 questions

What are the two ways to define inflation?

the two ways to define inflation are a rise in the average price dollar and a decrease in the purchasing power of the dollar.

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% (130.7/124.0 *100, take the difference over 100)

Deflation, a fall in prices, is generally worse than inflation a. True b. False

a. True

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

a. True (it helps borrowers and tends to also help the rich more than the poor)

Inflation is undesirable because it a. arbitrarily redistributes real income and wealth from the poor to the rich 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 from the poor to the rich (as the poor are making less, they spend their only money to the rich, and deplete their savings, thus is turn making the poor poorer and the rich richer)

Core inflation is defined as a. the overall inflation rate minus food and energy b. the overall inflation minus tobacco products and alcohol c. the 100 most important (core) goods and services that consumers purchase d. the overall inflation minus black market goods

a. the overall inflation rate minus food and energy (food and energy are highly volatile goods/services and they are necessities, so even with inflation they will still be bought and used at similar rates)

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, (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

The CPI reflects the cost of living for all households equally. a. True b. False

b. False

Inflation generally hurts everyone a. True b. False

b. False (inflation generally doesn't hurt the wealthy since they are receiving more income from the poor spending money, and borrowers from banks who have to pay back money in inflation are giving back money that cannot spend as much as when they originally borrowed it)

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 (small business owners are able to quickly and easily change their prices of their goods and services to keep up with inflation)

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 nor 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)

______ are generally hurt by unanticipated inflation while ______ are generally helped by unanticipated inflation. a. borrowed, lenders b. lenders, borrowers c. banks, government

b. lenders, borrowers and c. banks, government

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

The Federal Reserve's target interest rate is currently a. zero percent b. 1 percent c. 2 percent d. 4 percent

c. 2 percent

The Federal Reserve's target interest rate is currently a. zero percent b. 1 percent c. 2 percent d. 4 percent

c. 2 percent (a zero percent or 1 percent inflation rate would be inconceivable and would likely cause issues that could lead to worker discouragement from lower overall wages and deflations)

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 anticipated decrease in inflation

c. When there is an anticipated decrease in inflation

Inflation can be defined as a. a rise in the unemployment over time b. a decrease in the real GDP over time c. an increase in the general level of prices over time d. a decrease in the standard of living over time e. a decrease in the purchasing power of the dollar

c. an increase in the general level of prices over time and e. a decrease in the purchasing power of the dollar

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 (if the lender adjusts thee interest rate accordingly when there is an anticipation of inflation, then they will not be affected by receiving less valued money back from their borrower)

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 benefits

c. lenders are hurt, but borrowers benefit. (lenders are unable adjust interest which means they will receive back money that cannot buy as much as when it was taken out, but borrowers get to give back money that cannot buy as much)

Inflation is a rise in a. the unemployment over time b. the 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

Which of the following can be considered the costs of inflation? a. Real wages are lowered b. Lenders are hurt c. The economy produces less than it otherwise would d. All of the above

d. All of the above (Wages and prices normally move approximately together. It is true that those on fixed incomes will be hurt. Lenders are hurt when inflation is unanticipated. Anticipated inflation does not hurt lenders. Shoe leather and menu costs mean that resources that could be used to produce other goods and services are used to protect individuals and businesses from the effects of inflation.)

Deflation is generally worse than inflation because a. spending, which drives the economy, is slowing down b. when prices fall asset values fall which reduces spending c. when prices fall people will delay their spending to see if prices will fall farther d. all of the above

d. all of the above

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

What is the CPI, how is it calculated, and how is it used to calculate the inflation rate?

the CPI is the consumer price index and it is a measure of the variation in prices paid by typical consumers for retail goods and other items. the percent change in the CPI from the current year to the base year shows the inflation rate in consumer goods from these two comparable years.

For whom is the inflation rate important?

the inflation rate is important to everyone since it has the ability to effect everyone. it can effect anyone from bankers, to lender, to borrowers, to workers, etc.

How does the inflation rate relate to the natural rate of unemployment? (this question was answered in a previous chapter).

the inflation rate relates to the natural rate of unemployment ebuacae