Modules 14-15 Practice Problems

Menu costs of inflation are the:

costs associated with businesses changing prices.

A process that brings the inflation rate down, is called:

disinflation.

Which of the following represents the best scenario for a bank lending its money to a customer?

fixed interest rate of 8% with 1% inflation

Over the last year, Eli has been working very hard and his employer has taken notice by giving him a 6% raise in his salary. During this last year, overall prices in the economy have increased by 4%. Given this information, Eli's real wage has:

increased by 2%.

Shoe-leather costs refer to the:

increased cost of transactions due to inflation.

Inflation doesn't reduce purchasing power if:

it causes an increase in nominal wages equivalent to the rate of inflation.

When inflation rises quickly:

lenders will be hurt and borrowers will benefit.

The purpose of indexing Social Security payments to the CPI is to:

maintain the purchasing power of retirees.

The threat of future inflation:

makes people reluctant to loan money for long periods.

If money income remains the same, while the average price level doubles, then:

real income will fall.

Unanticipated inflation:

reduces the value of the debt owed by borrowers.

Currently banks are issuing personal loans at an interest rate of 9%. If expected inflation is supposed to be 3%, then:

the real interest rate is 6% and the nominal interest rate is 9%.

The costs arising from the way inflation makes money a less reliable unit of measurement are known as:

unit-of-account costs.

If the cost of a market basket is $200 in Year 1 and $230 in Year 2, the price index for Year 2 with a Year 1 base is:

115.

Year Consumer Price Index 1 80 2 (base year) 100 3 105 4 125 5 150 Table 15-1: The Consumer Price Index Use Table 15-1. The approximate rate of inflation in Year 5 is _____ percent.

20

You read in the newspaper that the CPI in 2008 was 120, you will conclude that a typical market basket in 2008 would have cost

20 percent more than the same market basket purchased in the base year.

Year Price Index 2005 100 2006 104 2007 103 2008 110 Table 15-2: Price Index Use Table 15-2. Consider the information in table provided. Which year is most likely to be the base year?

2005

Year Consumer Price Index 1 80 2 (base year) 100 3 105 4 125 5 150 Table 15-1: The Consumer Price Index Use Table 15-1. The approximate rate of inflation in Year 2 is _____.

25%

Suppose that the nominal rate of interest is 7% and the expected inflation rate is 3% then the real rate of interest is equal to:

4%.

Year Consumer Price Index 1 80 2 (base year) 100 3 105 4 125 5 150 Table 15-1: The Consumer Price Index Use Table 15-1. The approximate rate of inflation in Year 3 is _____ percent.

5

If the cost of a market basket is $150 in Year 1 and $200 in Year 2, the price index for Year 1 with a Year 2 base is:

75

Which of the following is a LIKELY response to inflation?

People tend to make more transactions.

Which of the following statistics is used to measure changes in the prices that firms pay for goods and services?

Producer Price Index

Which of the following is true?

Unexpected inflation benefits borrowers and hurts lenders.

Deflation is when there is:

a decreasing aggregate price level.

Suppose that a country has a progressive income tax code, where taxable income is calculated in nominal terms but the schedule of income tax rates is NOT indexed to inflation. An individual whose income keeps up with inflation will find that, overtime, she will pay:

a higher percentage of her income in taxes over time.

Inflation is when there is:

a rising aggregate price level.

The ______ is the most widely used measure of inflation in the United States.

consumer price index

The invention of ATM machines reduced:

shoe-leather costs of inflation.

If the actual inflation rate is less than the expected inflation rate, then:

the lenders gain and the borrowers lose.

The aggregate price level is:

the overall level of prices in the economy.