Week 8/9 (Homework)

An increase in all prices is inflation

False

What is a hyperinflation?

It is an inflation rate in excess of 200 percent per year

The expected rate of inflation is built into current nominal rates of interest.

True

Which of the following is correct? Inflation

impedes financial markets in their role of allocating resources

The implicit price deflator is given by the formula

nominal GDP ÷ real GDP

A COLA automatically raises the wage rate when

the consumer price index increases

If the real GDP in 2003 is $12,400 billion and the implicit price deflator is 1.4, what is the value of nominal GDP in 2003?

$17,360 billion

Which of these changes in the price index produces the greatest rate of inflation: 100 to 110, 150 to 165, or 180 to 198?

-100 to 110 -150 to 165 -180 to 198

The following are consequences of deflation?

-Deflation causes uncertainty about the future -The threat of deflation can make people reluctant to borrow for long periods -Firms may be reluctant to undertake investments for fear that the prices at which they can sell their output will drop

Which of the following is a consequence of unanticipated inflation?

-It reduces the value of money -It increases uncertainty about the future

Which of the following statements is true?

-The CPI is computed using a fixed basket of goods. -The CPI and the implicit price deflator can be used to calculate inflation.

The following individuals are hurt by inflation?

-Vjiay, who lent his friend $1,000 and agreed to accept repayment of the same amount one year later, but during the year, prices increased by 10 percent. -Randall, who lives on a fixed income of $800 per month. -Asuza, who keeps her savings in the form of cash in a safe at home.

The CPI is a useful index for all of the following reasons

-it is used to determine whether people's incomes are keeping up with the costs of the things they buy -it is used to measure changes in the cost of living -it is used to compute the U.S. inflation rate

Which of the following constitutes inflation?

a sustained increase in the average level of prices

Stagflation implies that

a tradeoff between inflation and unemployment may not always exist.

Year | 1967 | 1997 Assistant Prof's Salary | $10,000 | $40,000 Price Index | 1.0 | 4.2 Calculate the real income for an assistant professor in 1997.

approximately $9,520

To measure the "core" inflation rate, the Bureau of Economic Analysis uses a price measure that

excludes food and energy prices because the prices of these items can be volatile.

High and unexpected inflation has a greater cost

for savers in high income tax brackets than for savers in low income tax brackets

Measuring the rate of inflation using a market basket that excludes food and energy prices is preferred by some analysts because this measure, called core inflation,

gives a better measure of ongoing, sustained price changes

Year | Units of Output | Price per unit ($) 1994 | 40,000 | 10 1995 | 30,000 | 12 1996 | 50,000 | 12 1997 | 70,000 | 14 1998 | 60,000 | 16 1999 | 60,000 | 17 In which year(s) was the increase in nominal GDP (over the previous year) due exclusively to the increase in output?

in 1996

Analysis of the short-run Phillips curve suggests that policymakers who want to reduce unemployment in the short run should ______ aggregate demand at a cost of generating ______ inflation.

increase; higher

Demand-pull inflation is associated with

increasing aggregate demand and lower unemployment

Mary takes out a fixed interest rate loan and then inflation rises more than expected. The real interest rate she pays is

lower then she'd expected, and the real value of the loan falls

Deflation is bad because:

monetary policy becomes impotent

The inflation rate is defined as the

percentage change in the price level from the previous period

Economic data that are adjusted for price-level changes are said to be expressed in terms of

real dollars

Rising inflation means

that the price level is rising at an increasing rate

A period of time against which costs of the market basket in other periods will be compared in computing a price index is called

the base period

The consumer price index reflects

the changes in the prices of goods and services typically purchased by consumers

Changes in the producer price index are often thought to be useful in predicting changes in

the consumer price index

Which of the following is the broadest based price index?

the implicit price deflator

Along an actual (observed) Phillips curve,

the inflation rate varies inversely with the unemployment rate

The CPI is determined by computing:

the price of a fixed basket of goods and services, relative to the price of the same basket in a base year

The consumer price index is used to

turn dollar figures into meaningful measures of purchasing power

Economists measure the price level

using a price index

An indexed payment is one

whose dollar value changes with the rate of change in the price level

If the cost of a market basket is $200 in 2006 and $230 in 2007, the price index for 2007 using 2006 as the base year is

1.15

If the CPI is 120 in 2005 and 150 in 2006, what is the rate of inflation over this period?

25%

What is the difference between a nominal value and a real value?

A nominal value is measured in current market prices while a real value is measured in base year prices.

Year | 1975 | 2005 Mechanic's hourly wage | $30 | $84 Price Index | 1.2 | 3.2 What has happened to a mechanic's real hourly wage between 1975 and 2005?

It rose by 5%

Which of the following statements best describes the substitution bias in the construction of the CPI?

The failure to recognize that over time consumers alter the goods they buy, switching from relatively high priced goods toward lower-priced alternatives

Social Security payments are indexed for inflation using the CPI. A recent newspaper editorial claimed that Social Security recipients are harmed by years of low inflation because they do not receive as large an increase in their payments as they do in years of high inflation. Which of the following statements is correct?

The newspaper editorial is correct if the prices of the goods consumed by Social Security recipients increase faster than the prices of the goods in the market basket used to compute the CPI.

Chain-weighted measures of real GDP make use of prices from:

a continuously changing base year

Deflation is defined as

a fall in the average price level

A Phillips curve implies

a negative relationship between inflation and unemployment

A number whose movement reflects movement in the average level of prices is called

a price index

Suppose in 2007, nominal GDP in Clarendon was $12,840 billion and real GDP was $10,560 billion. Calculate the value of the implicit price deflator. Follow the convention of multiplying price indexes by 100.

121.59

The declining price of oil is deflation

False

During a period of high inflation:

borrowers are better off because they can pay off their loans with currency that is worth less

Andrew is offered a job in Little Rock, where the CPI is 80, and a job in New York, where the CPI is 125. Andrew's job offer in Little Rock is for $42,000. How much does the New York job have to pay in order for the two salaries to represent about the same purchasing power?

cannot be determined with this information