Deck 12: Inflation

Question 1

As domestic prices rise, people may buy imported goods instead of locally produced goods. This is known as the:

A) international substitution effect
B) inflation effect
C) income effect
D) real balance effect

Answer 1

A

Question 2

In the long run an increase in aggregate demand results in:

A) an increase in both the price level and aggregate output
B) no change in either output or the price level
C) a higher price level, but no change in output
D) an increase in aggregate output, but no change in the price level

Answer 2

C

Question 3

Inflation is:

A) an increase in the overall level of economic activity
B) a decrease in the overall price level
C) an increase in the overall price level
D) a decrease in the overall level of economic activity

Answer 3

C

Question 4

In the short run, the aggregate supply curve is:

A) vertical over all levels of output
B) horizontal over all levels of output
C) an upward- sloping curve
D) a downward- sloping curve

Question 5

An increase in aggregate demand will cause a increase in the price level when the economy is of the business cycle.

A) smaller; near the peak
B) larger; moving into the recessionary part
C) larger; near the trough
D) larger; near the peak

Question 6

The more the aggregate demand curve, the the price increase resulting from a leftward shift in the short- run aggregate supply curve.

A) elastic; higher
B) inelastic; higher
C) elastic; more permanent
D) inelastic; more permanent

Question 7

Decreasing membership in and power of Australian trade unions is likely to have:

A) increased the potential for cost- push inflation in Australia
B) eliminated cost- push inflation in Australia
C) decreased the potential for cost- push inflation in Australia
D) decreased the potential for cost- push inflation in Australia, but increased the potential for demand- pull inflation

Question 8

Which of the following is an assumption made under the 'new classical view'?

A) wages are flexible
B) prices are fixed
C) wages are fixed
D) expectations play no role in decision making

Question 9

Wages and prices chasing each other as aggregate demand continually shifts to the right and aggregate supply continually shifts to the left is called:

A) demand- pull inflation
B) a wage- price spiral
C) structural inflation
D) cost- push inflation

Question 10

Which of the following is an example of cost- push inflation?

A) Taxes are continuously decreased over a period of time.
B) Export demand for domestic goods increases continually.
C) Firms with market power use this power to constantly increase prices.
D) Government expenditure increases continuously over a period of time.

Question 11

Which of the following could lead to a period of cost- push inflation?

A) an increase in aggregate supply in the economy
B) a high growth rate of real wages
C) an increase in aggregate demand in the economy
D) automatic fiscal stabilisers

Question 12

Equilibrium between aggregate supply and aggregate demand is best described as a situation in which:

A) quantity demanded exceeds quantity supplied
B) the slope of aggregate demand equals the slope of aggregate supply
C) aggregate quantity demanded equals aggregate quantity supplied at a unique price level
D) quantity supplied exceeds quantity demanded at a unique price level

Question 13

Firms are most likely to increase prices in response to an increase in aggregate demand when:

A) the aggregate demand curve is quite steep
B) the aggregate supply curve is steep
C) the aggregate supply curve is quite flat
D) the aggregate demand curve is quite flat

Question 14

The Keynesian view regards the longrun as being typically a substantial period of time because:

A) market participants form rational expectations
B) wages are flexible
C) wages are negotiated for periods of one year or more
D) imbalances in the labour market clear very quickly

Question 15

Which of the following would be most likely to produce a rightward shift in the aggregate demand curve for the Australian economy?

A) Wages in Australia decrease.
B) Wages in Australia increase.
C) Chinese firms buy more coal from Australia.
D) Interest rates in Australia increase.

Question 16

In a period of cost- push inflation prices and output .

A) decrease; decreases
B) increase; decreases
C) increase; increases
D) decrease; increases

Question 17

An increase in the price level results in a/n in the demand for money, which, all else being the same, results in a/n _ _ in the interest rate.

A) increase; increase
B) decrease; decrease
C) decrease; increase
D) increase; decrease

Question 18

Between 2006 and 2007 oil prices nearly doubled. This caused:

A) the short- run aggregate supply curve to move to the right
B) a movement downwards along the short- run aggregate supply curve
C) the short- run aggregate supply curve to move to the left
D) a movement upwards along the short- run aggregate supply curve

Question 19

As a result of deflation:

A) borrowers gain and lenders lose
B) both borrowers and lenders gain
C) borrowers lose and lenders gain
D) both borrowers and lenders lose

Question 20

The long- run aggregate supply curve is found:

A) to the right of the point of intersection between short- run aggregate supply and aggregate demand
B) at the full- employment level of output
C) at the point of intersection between short- run aggregate supply and aggregate demand
D) eft of the point of intersection between short- run aggregate supply and aggregate demand

Question 21

The aggregate demand curve will shift outwards when:

A) the government increases income tax rates
B) new technology arises
C) the costs of production fall
D) consumer expenditure rises

Question 22

The aggregate demand curve will shift inwards when:

A) new technology arises
B) the costs of production inputs rise
C) the government increases income tax rates
D) the government reduces company tax rates

Question 23

Suppose the Australian economy is initially in equilibrium and demand for resources from China continues to increase year on year. This may result in:

A) cost- push inflation
B) demand- pull inflation
C) a onetime increase in the price level
D) none of the above as the Australian resource sector can provide an unlimited supply of resources for China

Question 24

Deflation is:

A) continuing falls in the general price level
B) a onetime increase in the general price level
C) continuing increases in the general price level
D) a onetime fall in the general price level

Question 25

Which of the following is NOT a potential problem with deflation?

A) Interest rate falls will over- stimulate the economy.
B) Expectations of future price falls can cause a fall in aggregate demand.
C) Debt burdens may rise as prices fall.
D) Employment levels may fall.

Question 26

Demand- pull inflation is caused by:

A) not enough aggregate demand to provide sufficient profits for producers
B) an increase in the costs of production which leads to inflation
C) a recession
D) persistently high levels of aggregate demand

Question 27

The term 'rational expectations' means:

A) people make full use of all the information available to them in forming expectations about the future
B) market participants are able to accurately predict changes in future prices
C) market participants have perfect information
D) market participants are able to accurately predict changes in future prices and other economic variables

Question 28

The aggregate demand curve:

A) is horizontal
B) slopes upward to the right
C) is vertical
D) slopes downward to the right

Question 29

Cost- push inflation is the result of:

A) a one- off increase in short- run aggregate supply
B) persistent increases in short- run aggregate supply
C) a one- off increase in aggregate demand
D) persistent increase in aggregate demand

Question 30

Which of the following nations has experienced problems with deflation?

A) Japan
B) the United States
C) the United Kingdom
D) Australia

Question 31

Which of the following is most likely to cause a rightward shift in the short- run aggregate supply curve?

A) capital accumulation
B) a better skilled workforce
C) an improvement in technology
D) a decrease in wages

Question 32

The short- run aggregate supply curve illustrates:

A) the positive relationship between the price level and aggregate quantity supplied
B) the negative relationship between the price level and aggregate quantity supplied
C) the positive relationship between the price of a product and the quantity supplied
D) the negative relationship between the price of a product and the quantity supplied

Question 33

Aggregate demand is denoted by:

A) C + I + X - M - S - G
B) C + I + G + (X - M)
C) C + I + G + X
D) C + I + G + (M - X)

Question 34

In the long run, the aggregate supply curve is:

A) horizontal
B) downward sloping
C) perfectly inelastic
D) perfectly elastic

Question 35

Deflation increases the debt burden:

A) of both firms and households
B) of neither firms nor households
C) of firms but not households
D) of households but not firms

Question 36

Hyperinflation is:

A) a period of increases in interest rates
B) a period of rapid increases in the overall price level
C) a period of deflation and rising unemployment
D) a sustained increase in the overall price level

Question 37

Domestic monopoly power can lead to:

A) wage- push inflation
B) profit- push inflation
C) demand- pull inflation
D) import- price- push inflation

Question 38

The long- run aggregate supply curve will shift outwards and to the right when:

A) the government reduces personal income tax
B) the government increases company tax rates
C) new technology is developed
D) the costs of inputs in production rise

Question 39

If the actual price level in the macro economy is below the equilibrium price level:

A) excess demand will drive prices back up to the equilibrium price
B) excess demand causes the demand curve to move inwards
C) excess demand causes the demand curve to move outwards
D) excess supply will drive prices back up to the equilibrium price

Question 40

One explanation of why the aggregate demand curve is downward sloping is that:

A) as prices fall, nominal income rises and so does the demand for real goods and services
B) businesses increase investment spending in response to higher interest rates caused by inflation
C) with falling prices, government decides to spend less to increase the price level
D) rising prices reduce people's wealth and therefore reduce spending

Question 41

How will the elasticity of the aggregate demand curve impact on the increase in the price level which follows a leftward shift in the short- run aggregate supply curve?

Question 42

What factors shift the short- run aggregate supply curve?

Question 43

Explain why the aggregate supply curve is vertical in the long run.

Question 44

What is the 'international effect' and why does it contribute to the negative slope of the aggregate demand curve?

Question 45

Distinguish between demand- pull and cost- push inflation.

Question 46

The nature of inflation can change from cost- push to demand- pull as governments and firms interact in an inflationary period.

Question 47

The long- run supply curve is generally upward sloping, but sometimes vertical.

Question 48

As actual GDP gets closer to the potential output level, inflation is more likely to occur.

Question 49

When price levels are declining, consumer debt levels should also fall.

Question 50

Keynesians believe that:

A) prices and wages are inflexible
B) prices are flexible both upwards and downwards
C) wages are flexible both upwards and downwards
D) firms change their prices often in response to changing market conditions

Question 51

Explain the process by which the economy returns to the equilibrium price if the actual price is below equilibrium.

Question 52

Why does the burden of household debt increase as the general price level falls?

Question 53

What factors shift the long- run as well as the short- run aggregate supply curves?

Question 54

Find the word or phrase that best completes each statement.
Statement
a() A decrease in exports will:
b() An increase in technology will:
c() An increase in government expenditure will:
Answer

Question 55

The concentration of economic power into either the hands of firms or unions can both lead to inflation.

Question 56

Why is business confidence important for an economic recovery?

Question 57

Interest rate policy became largely ineffective in Japan in the late 1990s due to deflation.

Question 58

Find the word or phrase that best completes each statement.
Statement
a() When firms use their monopoly power to push up prices, this is known as:
b() When wages rise independently of the demand for labour, this is known as:
c() If the price of oil rises, this would be known as:
Answer

Question 59

What is the 'real balance effect' and why does it contribute to the negative slope of the aggregate demand curve?

Question 60

Aggregate demand is comprised of consumer spending, investment spending, government spending and import spending.

Question 61

Demand- pull inflation is caused by increases in prices of production inputs, which pull price levels up higher.

Question 62

Explain and illustrate using the aggregate demand and aggregate supply framework, cost- push and demand- pull inflation.

Question 63

Explain the difference between the Keynesian and new classical view of the long run.

Question 64

Keynes said 'in the long run we are all dead'. What did he mean by this statement?

Question 65

Demand- pull inflation is associated with a long- term decrease in unemployment.

Question 66

The 'new classical view' states that generally government policy to increase aggregate demand will be ineffective.

Question 67

The aggregate supply curve will shift to the right if there is an increase in the price of oil - a major production input.

Question 68

Keynesian economists focus on the effect that expectations have on prices and wages.

Question 69

Demand- pull inflation and cost- push inflation cannot occur at the same time due to the very different causes of each type of inflation.

Question 70

In the short run, diminishing returns can help to explain why the aggregate supply curve slopes upwards.

Question 71

The real balance effect refers to the effect that higher prices have on the value of people's money, and therefore their spending levels.

Question 72

Cost- push inflation can be caused by a fall in the exchange rate.

Question 73

A change in technology will shift the aggregate demand curve to the right, (assuming other factors remain constant).

Question 74

Deflation decreases the real value of household debt.

Question 75

Why does the aggregate demand curve slope downwards?

Question 76

How can cost- push inflation change to demand- pull inflation?

Question 77

Why can continually falling prices be a problem?

Question 78

Cost- push inflation can be caused by persistent increases in government expenditure.

Question 79

As more output is demanded, unemployment falls, therefore the demand- pull inflation that results when output increases is good for the economy.