HW 8

Demand-pull inflation is associated with A. decreasing aggregate demand and lower unemployment B. increasing aggregate demand and lower unemployment C. decreasing aggregate demand and greater unemployment D. increasing aggregate demand and greater unemployment E. a rising price level caused by a shift in either aggregate demand or aggregate supply

B. increasing aggregate demand and lower unemployment

Changes in the producer price index are often thought to be useful in predicting changes in A. stock prices. B. the consumer price index. C. the unemployment rate. D. the rate of output of goods and services.

B. the consumer price index.

The consumer price index is used to A. differentiate gross national product from net national product. B. turn dollar figures into meaningful measures of purchasing power. C. characterize the types of goods and services that consumers purchase. D. measure the quantity of goods and services that the economy produces.

B. turn dollar figures into meaningful measures of purchasing power.

Economists measure the price level A. by keeping track of nominal GDP. B. using a price index. C. by measuring the growth rate in money supply. D. by measuring the growth rate in real GDP.

B. using a price index.

Which of the following individuals is not hurt by inflation? A. Akshay, who borrowed $1,000 from a friend and agreed to pay the same amount one year later, but during the year, prices increased by 10 percent. B. 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. C. Randall, who lives on a fixed income of $800 per month. D. Asuza, who keeps her savings in the form of cash in a safe at home.

A. Akshay, who borrowed $1,000 from a friend and agreed to pay the same amount one year later, but during the year, prices increased by 10 percent.

What is a hyperinflation? A. It is an inflation rate in excess of 200 percent per year. B. It is a combination of excessive increase in the price level and rising unemployment. C. It refers to a situation where a country's money supply is no longer backed by gold. D. It is a situation in which financial markets collapse and the government is forced to print money.

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

During a period of high inflation: A. borrowers are better off because they can pay off their loans with currency that is worth less. B. borrowers are worse off because they have to pay off their loans with currency that is worth more. C. lenders are worse off because they cannot find anyone who wants a loan. D. lenders are worse off because they are repaid with currency that is worth more. E. none of the above.

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

To measure the "core" inflation rate, the Bureau of Economic Analysis uses a price measure that A. excludes food and energy prices because the prices of these items can be volatile. B. includes food and energy prices because the se items account for a significant portion of the typical consumer's expenditures. C. is made up of a fixed basket that includes durable goods, non-durable goods, and services. D. includes prices for different components of gross private domestic investment, government spending, and personal consumption expenditures.

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

Which of the following is correct? Inflation A. impedes financial markets in their role of allocating resources. B. reduces the purchasing power of the average consumer. C. generally increases after-tax real interest rates. D. is most costly when anticipated.

A. impedes financial markets in their role of allocating resources.

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. A. increase; higher B. increase; lower C. decrease; higher D. decrease; lower

A. increase; higher

The consumer price index reflects A. the changes in the prices of goods and services typically purchased by consumers. B. the average level of prices for intermediate goods and services purchased by business. C. the median price of a typical single family home. D. prices of all goods and services computed from the ratio of nominal GDP to real GDP.

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

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. A. 21.59 B. 82.24 C. 121.59 D. 177.57

C. 121.59

If the CPI is 120 in 2005 and 150 in 2006, what is the rate of inflation over this period? A. 8% B. 20% C. 25% D. 30%

C. 25%

Which of the following is not a consequence of deflation? A. Deflation causes uncertainty about the future. B. The threat of deflation can make people reluctant to borrow for long periods. C. Deflation causes the real value of money to fall. D. Firms may be reluctant to undertake investments for fear that the prices at which they can sell their output will drop.

C. Deflation causes the real value of money to fall.

Which of the following is a consequence of unanticipated inflation? It reduces the value of money. It increases the value of future obligations. It increases uncertainty about the future. A. I only B. I and II only C. I and III only D. I, II, and III

C. I and III only

Which of the following statements is true? The CPI is computed using a fixed basket of goods. The implicit price deflator is computed a fixed basket of goods. The CPI and the implicit price deflator can be used to calculate inflation. A. I, II, and III B. I and II only C. I and III only D. II and III only

C. I and III only

The expected rate of inflation is built into current nominal rates of interest. A. True B. False

True

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 A. 1.00. B. 1.15. C. 1.30. D. 2.00.

B. 1.15.

Chain-weighted measures of real GDP make use of prices from: A. an unchanging base year. B. a continuously changing base year. C. a base year that is changed approximately every 5 years. D. a base year that is changed approximately every 10 years.

B. a continuously changing base year.

Deflation is defined as A. a decrease in the inflation rate. B. a fall in the average price level. C. a period during which the average price level is low. D. a low rate of change in average prices.

B. a fall in the average price level.

Stagflation implies that A. policymakers can choose to have less unemployment if they are willing to accept a higher rate of inflation. B. a tradeoff between inflation and unemployment may not always exist. C. any relationship between the inflation and unemployment was purely random. D. the relationship predicted by the Phillips curve is stable.

B. a tradeoff between inflation and unemployment may not always exist.

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,: A. provides a real, rather than a nominal, rate of inflation. B. gives a better measure of ongoing, sustained price changes. C. is more consistent with measures of inflation used in other countries. D. fluctuates more than measures of inflation that include food and energy prices.

B. gives a better measure of ongoing, sustained price changes.

Which of the following statements best describes the substitution bias in the construction of the CPI? A. Not taking into account that consumers alter their buying habits as new products come into being and lifestyles change, for example, the rising popularity of cell phones instead of land-line phones. B. Not accounting for the fact that consumers are effectively getting more product for their money because technological changes have led to improvements in quality and lower production costs over time. C. The failure to recognize that over time consumers alter the goods they buy, switching from relatively high priced goods toward lower-priced alternatives. D. The failure to capture the fact that consumers have made substitutions in their shopping habits: shifting from high-priced department stores to lower-priced discount stores.

C. 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? A. The newspaper editorial is correct under all circumstances. B. The newspaper editorial is correct if the market basket consumed by Social Security recipients is the same as the market basket used to compute the CPI. C. 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. D. The newspaper editorial is correct if the prices of the goods consumed by Social Security recipients increase more slowly than the prices of the goods in the market basket used to compute the CPI.

C. 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.

A Phillips curve implies A. a negative relationship between consumption and saving. B. a positive relationship between inflation and prices. C. a negative relationship between inflation and unemployment. D. a positive relationship between consumption expenditure and inflation.

C. a negative relationship between inflation and unemployment.

A number whose movement reflects movement in the average level of prices is called A. unemployment. B. inflation. C. a price index. D. an unemployment rate.

C. a price index.

The CPI is a useful index for all of the following reasons except A. it is used to determine whether people's incomes are keeping up with the costs of the things they buy. B. it is used to measure changes in the cost of living. C. it used to measure the average price level of all final goods and services produced. D. it is used to compute the U.S. inflation rate.

C. it used to measure the average price level of all final goods and services produced.

Deflation is bad because: A. wages decline. B. prices decline. C. monetary policy becomes impotent. D. fiscal policy becomes impotent. E. deflation is not bad.

C. monetary policy becomes impotent.

The implicit price deflator is given by the formula A. nominal GDP in current period ÷ nominal GDP in base period. B. nominal GDP in current period ÷ real GDP in base period. C. nominal GDP ÷ real GDP. D. real GDP ÷ nominal GDP.

C. nominal GDP ÷ real GDP.

The inflation rate is defined as the A. price level. B. change in the price level from one period to the next. C. percentage change in the price level from the previous period. D. price level minus the price level from the previous period.

C. percentage change in the price level from the previous period.

Rising inflation means A. that the price level is increasing by a given percentage rate. B. that the prices of all goods and services increase from year to year. C. that the price level is rising at an increasing rate. D. that the price level is rising at a variable rate.

C. that the price level is rising at an increasing rate.

A COLA automatically raises the wage rate when A. GDP increases. B. taxes increase. C. the consumer price index increases. D. the producer price index increases.

C. the consumer price index increases.

Which of the following is the broadest based price index? A. the consumer price index B. the producer price index C. the implicit price deflator D. the personal consumption expenditures price index

C. the implicit price deflator

Along an actual (observed) Phillips curve, A. aggregate output varies inversely with the unemployment rate. B. aggregate output directly inversely with the inflation rate. C. the inflation rate varies inversely with the unemployment rate. D. the inflation rate varies directly with the unemployment rate.

C. the inflation rate varies inversely with the unemployment rate.

The CPI is determined by computing: A. an average of prices of all goods and services. B. the price of a basket of goods and services that changes every year, relative to the same basket in a base year. C. the price of a fixed basket of goods and services, relative to the price of the same basket in a base year. D. nominal GDP relative to real GDP.

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

An indexed payment is one A. whose real value changes with the rate of change in the price level. B. whose nominal value is held constant. C. whose dollar value changes with the rate of change in the price level. D. whose nominal value is equal to its value.

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

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? A. approximately $886 billion. B. approximately $8,857 billion. C. approximately $15,427 billion. D. $17,360 billion.

D. $17,360 billion. why: nominal GDP/real GDP = implicit price deflator so nominal GDP = (real GDP)(implicit price deflator) nominal GDP = (12,400)(1.4) = 17,360

What is the difference between a nominal value and a real value? A. A nominal value is measured in monetary units while a real value is measured in current dollars. B. A nominal value is measured in market rates while a real value is measured in terms of exchange rates. C. A nominal value is measured in units of constant purchasing power while a real value is measured in units of current purchasing power. D. A nominal value is measured in current market prices while a real value is measured in base year prices.

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

Which of these changes in the price index produces the greatest rate of inflation: 100 to 110, 150 to 165, or 180 to 198? A. 100 to 110 B. 150 to 165 C. 180 to 198 D. All three changes show the same rate of inflation.

D. All three changes show the same rate of inflation.

Which of the following constitutes inflation? A. an increase in medical care costs B. a one time increase in average level of prices C. an increase in the market interest rate D. a sustained increase in the average level of prices

D. a sustained increase in the average level of prices

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? A. $74,667 B. $65,625 C. $60,900 D. cannot be determined with this information

D. cannot be determined with this information

High and unexpected inflation has a greater cost A. for those who borrow than those who save. B. for those who hold a little money than for those who hold a lot of money. C. for those whose wages increase by as much as inflation, than those who are paid a fixed nominal wage. D. for savers in high income tax brackets than for savers in low income tax brackets.

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

Mary takes out a fixed interest rate loan and then inflation rises more than expected. The real interest rate she pays is A. higher than she'd expected, and the real value of the loan rises. B. higher than she'd expected, and the real value of the loan falls. C. lower than she'd expected, and the real value of the loan rises. D. lower then she'd expected, and the real value of the loan falls.

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

Economic data that are adjusted for price-level changes are said to be expressed in terms of A. historical dollars. B. variable dollars. C. nominal dollars. D. real dollars.

D. real dollars.

A period of time against which costs of the market basket in other periods will be compared in computing a price index is called A. the inflation period. B. the market basket. C. the adjustment period. D. the base period.

D. the base period.

An increase in all prices is inflation True False

False

The declining price of oil is deflation True False

False