Deck 16: Inflation

Question 1

Because it excludes food and energy prices, _______ inflation is more stable than _______ inflation.

A) core; headline
B) headline; core
C) core; nominal
D) nominal; core

Answer 1

core; headline

Question 2

The aggregate price level is:

A) a measure of the average price level for GDP.
B) measured by the CPI.
C) measured by the GDP price deflator.
D) All of these statements are true.

Answer 2

All of these statements are true.

Question 3

The table shown provides CPI values for various years. What was the inflation rate in 2016?

A) 2.9 percent
B) −1.9 percent
C) 1.9 percent
D) 4 percent

Answer 3

4 percent

Question 4

Which measure of inflation best reflects underlying trends in the economy?

A) Core inflation
B) Headline inflation
C) The Producer Price Index
D) The GDP deflator

Question 5

When the prices of food and energy are added to core inflation, we get:

A) core deflation.
B) headline inflation.
C) hyperinflation.
D) adjusted inflation.

Question 6

An overall decline in prices is called:

A) inflation.
B) deflation.
C) the consumer price index.
D) the producer price index.

Question 7

A news article states the following: "Inflation moved ahead by 2.1 percent this quarter, an increase largely driven by changes in the price of gasoline." Which measure of inflation is the report describing?

A) Core inflation
B) Headline inflation
C) The Producer Price Index
D) The GDP deflator

Question 8

The _______ price level is a measure of the average price level for GDP.

A) aggregate
B) national
C) economy
D) total

Question 9

Core inflation:

A) excludes goods with historically volatile price changes.
B) is the overall rise in prices in the economy.
C) excludes durable goods.
D) is not regularly tracked by the BLS.

Question 10

The table shown provides CPI values for various years. What was the inflation rate in 2018?

A) 2.9 percent
B) −1.9 percent
C) 1.9 percent
D) 4 percent

Question 11

Deflation is an overall:

A) rise in prices.
B) decline in prices.
C) rise in prices, excluding goods and services with historically volatile price changes.
D) decline in prices, excluding goods and services with historically volatile price changes.

Question 12

To measure core inflation, the BLS excludes _______ from the basket of goods used to calculate the CPI.

A) food and energy
B) food, clothing, and housing
C) food and housing
D) housing and energy

Question 13

An overall rise in prices is called:

A) inflation.
B) deflation.
C) the consumer price index.
D) the producer price index.

Question 14

Headline inflation is:

A) core inflation plus the prices of food and energy.
B) core inflation seasonally adjusted.
C) the change in prices of inputs used by Fortune 500 companies.
D) core inflation minus the price of inputs.

Question 15

Which of these is not considered when calculating core inflation?

A) Food
B) Housing
C) Clothing
D) Entertainment

Question 16

Headline inflation:

A) includes all of the goods the average consumer buys.
B) is based on the CPI basket of goods.
C) core inflation plus the prices of food and energy.
D) All of these statements are true.

Question 17

Inflation is an overall:

A) rise in prices.
B) decline in prices.
C) rise in prices, excluding goods and services with historically volatile price changes.
D) decline in prices, excluding good and services with historically volatile price changes.

Question 18

To measure core inflation, the BLS removes goods that:

A) have historically volatile prices.
B) have low elasticity.
C) have historically stable prices.
D) have high elasticity.

Question 19

Which measure of inflation best reflects changing prices for the average consumer?

A) Headline inflation
B) Core inflation
C) The Producer Price Index
D) The GDP deflator

Question 20

The table shown provides CPI values for various years. What was the inflation rate in 2017?

A) 4 percent
B) −1.9 percent
C) 1.9 percent
D) 2.9 percent

Question 21

The classical theory of inflation:

A) describes a long-run equilibrium.
B) explains the direct relationship between money supply and the price level.
C) shows the neutrality of money in the long run.
D) All of these statements are true.

Question 22

Neutrality of money is the idea that:

A) changes in aggregate price levels do not affect real outcomes in the economy.
B) monetary policy conducted by the Fed has no real impact on the economy.
C) it makes no difference who is spending each dollar in real terms.
D) there is no difference between fiscal and monetary policy as long as the same amount of money is injected into the economy.

Question 23

The graph shown displays various price and output levels in an economy. What does the "Y" on the x-axis stand for?

A) Full employment level of output
B) Current level of GDP
C) Observed level of output
D) Future target goal for output

Question 24

During a bout of hyperinflation, suppose the country of Weimar announces it will be rolling out a new currency, the Weimar Mark, which is worth 1 million Marks. Neutrality of money suggests this change will:

A) not influence prices in the overall economy.
B) dramatically decrease real wealth.
C) only change core inflation.
D) None of these are true.

Question 25

The graph shown displays various price and output levels in an economy. If the economy is currently at point E₂, what could be said about its unemployment?

A) There is higher unemployment than the natural rate.
B) There is lower unemployment than the natural rate.
C) The unemployment rate is near the natural rate.
D) The unemployment rate is zero.

Question 26

The money value of goods or services sold is measured in:

A) nominal values.
B) real values.
C) aggregated values.
D) intermediate values.

Question 27

The graph shown displays various price and output levels in an economy. If the economy is currently at point E₃, what could be said about its unemployment?

A) There is higher unemployment than the natural rate.
B) There is lower unemployment than the natural rate.
C) The unemployment rate is near the natural rate.
D) The unemployment rate is zero.

Question 28

In the long run, an increase in the aggregate price level:

A) doesn't change real output.
B) decreases real output.
C) increases real output.
D) may increase or decrease real output.

Question 29

Nominal output is the _______ of goods and services produced and real output is the _______ of goods and services produced.

A) dollar value; actual amount
B) actual amount; dollar value
C) actual amount; dollar value with inflation
D) dollar value with inflation; dollar value without inflation

Question 30

The graph shown displays various price and output levels in an economy. If the economy is currently at point E₁, what could be said about its unemployment?

A) There is higher unemployment than the natural rate.
B) There is lower unemployment than the natural rate.
C) The unemployment rate is near the natural rate.
D) The unemployment rate is zero.

Question 31

The idea that changes in aggregate price levels do not affect real outcomes in the economy is called the:

A) neutrality of money.
B) aggregate price theory.
C) neutrality of prices.
D) real output theory.

Question 32

The relationship between the money supply, output, and the overall price level is illustrated by the:

A) classical theory of inflation.
B) neutrality of money.
C) aggregate price level.
D) measure of real output.

Question 33

Price indexes allow us to convert _______ measures of output into _______ measures of output.

A) nominal; real
B) real; nominal
C) perceived; real
D) nominal; perceived

Question 34

The classical theory of inflation illustrates the relationship between which elements? I. The money supply
II) Spending
III) Savings
IV) Output
V, Investment
VI) The overall price level

A) I, IV, and VI
B) II, III, and VI
C) I, IV, and V
D) II, III, and V

Question 35

The actual quantity of goods or services sold is measured in:

A) nominal values.
B) real values.
C) aggregated values.
D) intermediate values.

Question 36

The graph shown displays various price and output levels in an economy. Which point on the graph would represent a recession?

A) E ₁
B) E ₂
C) E ₃
D) E ₄

Question 37

The graph shown displays various price and output levels in an economy. What does the "P" on the y-axis stand for?

A) Average price level
B) Inflation rate
C) Price of GDP
D) Price of Y

Question 38

The graph shown displays various price and output levels in an economy. Which point on the graph shown would represent an economic expansion?

A) E ₁
B) E ₂
C) E ₃
D) E ₄

Question 39

Price indexes:

A) allow us to convert nominal measures of output into real measures of output.
B) help us measure the goods and services consumers can purchase with their money.
C) are used to measure the aggregate price level.
D) All of these statements are true.

Question 40

If the Fed doubled the money supply in one day, the amount of goods and services traded would:

A) not change.
B) increase.
C) decrease.
D) fall to zero.

Question 41

If an economy produces 3,000 units of output when the price level is $2 and the money supply is $2,000, what is the velocity of money?

A) 2
B) 3
C) 67
D) 150

Question 42

The graph shown displays various price and output levels in an economy. If the economy is currently at point E₂, the Fed is most likely to undertake _______ monetary policy because it will shift _______.

A) expansionary; AD to the right
B) contractionary; AD to the left
C) expansionary; AD to the left
D) contractionary; AS to the right

Question 43

If an economy produces 1,000 units of output when the price level is $1 and the money supply is $500, what is the velocity of money?

A) 2
B) 500
C) 50
D) 5

Question 44

The quantity theory of money relies on which variable to remain constant?

A) The velocity of money
B) The money supply
C) The price level
D) Unemployment

Question 45

According to the quantity theory of money, an increase in the money supply leads to a(n) _______ in prices, as _______ dollar bills are spent on _______ goods and services.

A) increase; more; the same number of
B) increase; the same number of; more
C) decrease; more; the same number of
D) decrease; the same number of; more

Question 46

The graph shown displays various price and output levels in an economy. If the economy is currently at point E₂, what would be the impact of expansionary monetary policy?

A) Higher prices and higher output
B) Higher prices and lower output
C) Lower prices and higher output
D) Lower prices and lower output

Question 47

According to the quantity theory of money, a decrease in prices would occur due to:

A) a decrease in the money supply.
B) an increase in the money supply.
C) a decrease in the production of output.
D) an increase in the production of output.

Question 48

If an economy produces 5,000 units of output when the price level is $1 and the velocity of money is 4, what is the money supply?

A) $4,000
B) $1,250
C) $2,500
D) $5,000

Question 49

If an economy produces 2,000 units of output when the price level is $2 and the money supply is $1,000, what is the velocity of money?

A) 4
B) 500
C) 1
D) 2

Question 50

The graph shown displays various price and output levels in an economy. If the economy is currently at point E₁, it must be in:

A) long-run equilibrium.
B) a recession.
C) an economic boom.
D) an economic recovery.

Question 51

The velocity of money is:

A) the number of transactions a typical dollar is used in during a given period.
B) the number of goods a typical dollar can buy in a given period.
C) how quickly money is created through the financial system.
D) how quickly consumers spend their wages.

Question 52

If an economy produces 3,000 units of output when the price level is $2 and the velocity of money is 12, what is the money supply?

A) $1,000
B) $500
C) $2,000
D) $4,000

Question 53

If an economy produces 2,000 units of output when the price level is $1 and the money supply is $1,000, what is the velocity of money?

A) 2
B) 500
C) 50
D) 5

Question 54

The idea that the value of money is determined by the overall quantity of money in existence is known as:

A) the quantity theory of money.
B) the dual mandate.
C) the price level requirement.
D) core inflation.

Question 55

The graph shown displays various price and output levels in an economy. If the economy is currently at point E₃, it must be in:

A) long-run equilibrium.
B) a recession.
C) an economic expansion.
D) an economic recovery.

Question 56

According to the quantity theory of money, if there are fewer dollars available to spend on the same number of goods and services, then:

A) the price level will fall.
B) the price level will rise.
C) output will decrease.
D) output will increase.

Question 57

The number of transactions a typical dollar is used in during a given period is called the:

A) velocity of money.
B) transaction rate.
C) quantity theory of money.
D) monetary depreciation.

Question 58

If an economy produces 4,000 units of output when the price level is $2 and the velocity of money is 8, what is the money supply?

A) $1,000
B) $8,000
C) $2,000
D) $4,000

Question 59

The quantity theory of money explicitly states that:

A) the value of money is determined by the overall quantity of money in existence.
B) real GDP is determined by the money supply.
C) the money supply is determined by the price level.
D) there is no relationship between the value of money and the quantity of money in existence.

Question 60

If an economy produces 1,000 units of output when the price level is $5 and the money supply is $1,000, what is the velocity of money?

A) 5
B) 200
C) 50
D) 2

Question 61

Demand-pull inflation occurs when the:

A) price of a key input increases suddenly.
B) price level changes in response to changes in the business cycle.
C) price of food or energy increases suddenly.
D) business cycle becomes sporadic and unpredictable.

Question 62

Which of the following is associated with predictable inflation?

A) Tax distortions
B) Budget charges
C) Overheads
D) The re-distribution of purchasing power

Question 63

If an economy has a money supply of $200, a velocity of money of 12, and a price level of $2, how many units of output does it produce?

A) 1,200
B) 2,400
C) 600
D) 6,000

Question 64

Which of the following is not associated with predictable inflation?

A) Menu costs
B) Shoe-leather costs
C) Tax distortions
D) Labor costs

Question 65

What is the quantity equation?

A) M × V = P × Y
B) M × P = Y × V
C) P × V = M × Y
D) M × Y = P × V

Question 66

If we know values for the money supply and the velocity of money, we can calculate:

A) the price value of real output.
B) real output.
C) the rate of inflation.
D) the nominal value of firms' outputs.

Question 67

Cost-push inflation occurs when the:

A) price of a key input increases suddenly.
B) price level changes in response to changes in the business cycle.
C) prices of necessity goods increase suddenly.
D) business cycle becomes sporadic and unpredictable.

Question 68

If an economy produces 2,500 units of output when the money supply is $500 and the velocity of money is 10, what is the price level?

A) $1
B) $5
C) $2
D) $10

Question 69

According to the quantity theory of money, increasing the money supply:

A) leads to inflation.
B) increases production.
C) leads to decreased spending.
D) decreases the velocity of money.

Question 70

When the price of a key input increases suddenly, it causes:

A) cost-push inflation.
B) the business cycle to become sporadic.
C) demand-pull inflation.
D) the velocity of money to rise.

Question 71

Menu costs refer to:

A) the money, time, and opportunity used to change prices to keep pace with inflation.
B) the time, money, and effort one has to spend managing cash in the face of inflation.
C) the higher taxes one must pay when earning a greater dollar amount, even though real purchasing power hasn't changed.
D) the labor costs associated with inflation.

Question 72

Shoe-leather costs refer to:

A) the money, time, and opportunity used to change prices to keep pace with inflation.
B) the time, money, and effort one has to spend managing cash in the face of inflation.
C) the higher taxes one must pay when earning a greater dollar amount, even though real purchasing power hasn't changed.
D) the labor costs associated with inflation.

Question 73

The quantity equation implies that any decrease in the money supply will lead directly to:

A) an increase in the price level.
B) a decrease in the price level.
C) an increase in real output.
D) a decrease in real output.

Question 74

If the average price level increases 10 percent per year, and the velocity of money is 2, then the inflation rate is:

A) 10 percent.
B) 5 percent.
C) 2 percent.
D) 20 percent.

Question 75

A constant velocity of money in the quantity equation implies that any increase in the money supply will lead directly to:

A) an increase in the price level.
B) a decrease in real output.
C) an increase in real output.
D) a decrease in the price level.

Question 76

If an economy produces 3,000 units of output when the money supply is $500 and the velocity of money is 9, what is the price level?

A) $1.50
B) $2
C) $4.50
D) $9

Question 77

Severe oil shortages in the United States during the 1970s created:

A) cost-push inflation.
B) demand-pull inflation.
C) a recession.
D) an increase in the velocity of money.

Question 78

According to the quantity theory of money, the Fed could combat inflation by:

A) decreasing the supply of money.
B) increasing the supply of money.
C) reducing taxes.
D) increasing taxes.

Question 79

A temporary change in the price level caused by changes in the business cycle is known as:

A) demand-pull inflation.
B) cost-push inflation.
C) demand-push inflation.
D) cost-pull inflation.

Question 80

Tax distortion refers to the cost of inflation that comes from:

A) the money, time, and opportunity used to change prices to keep pace with inflation.
B) the time, money, and effort one has to spend managing cash in the face of inflation.
C) the higher taxes one must pay when earning a greater dollar amount, even though real purchasing power hasn't changed.
D) the labor costs associated with inflation.