week 8

Demand-pull inflation is associated with

increasing aggregate demand and lower unemployment

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

real dollars

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

true

Economists measure the price level

using a price index

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.

Stagflation implies that

a tradeoff between inflation and unemployment may not always exist.

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.

An increase in all prices is inflation T/F

false

The declining price of oil is deflation t/f

false

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.

Which of the following is a consequence of unanticipated inflation? i It reduces the value of money. ii It increases the value of future obligations. iii It increases uncertainty about the future.

i and iii only

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

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 implicit price deflator is given by the formula

nominal GDP ÷ real GDP.

The inflation rate is defined as the

percentage change in the price level from the previous period.

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

price index

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.

A COLA automatically raises the wage rate when

the consumer price index increases.

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? 1.the producer price index 2.the consumer price index 3. the personal consumption expenditures price index 4. the implicit price deflator

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.

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.

What is a hyperinflation?

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

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

Which of the following constitutes inflation?

a sustained increase in the average level of prices

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

Which of the following is not a consequence of deflation? 1. Firms may be reluctant to undertake investments for fear that the prices at which they can sell their output will drop. 2. Deflation causes the real value of money to fall. 3. The threat of deflation can make people reluctant to borrow for long periods. 4. Deflation causes uncertainty about the future.

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

Which of the following statements best describes the substitution bias in the construction of the CPI? 1. 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. 2. The failure to recognize that over time consumers alter the goods they buy, switching from relatively high priced goods toward lower-priced alternatives. 3. 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. 4. 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.

2. 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? 1. The newspaper editorial is correct under all circumstances. 2. 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. 3. 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. 4.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.

2. 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.

The CPI is a useful index for all of the following reasons except 1. it is used to measure changes in the cost of living. 2. it used to measure the average price level of all final goods and services produced. 3. it is used to determine whether people's incomes are keeping up with the costs of the things they buy. 4.it is used to compute the U.S. inflation rate.

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

Which of the following individuals is not hurt by inflation? 1. 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. 2. Randall, who lives on a fixed income of $800 per month. 3. 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. 4. Asuza, who keeps her savings in the form of cash in a safe at home.

3. 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.

Which of the following is correct? Inflation 1. generally increases after-tax real interest rates. 2. is most costly when anticipated. 3. reduces the purchasing power of the average consumer. 4. impedes financial markets in their role of allocating resources.

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

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

All three changes show the same rate of inflation.

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.

I and III only

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