Question 1

In World War II, government spending for the war&#10;A) was approximately 4% of GDP.&#10;B) was financed entirely by increased taxes.&#10;C) was approximately 40% of GDP.&#10;D) was financed entirely from the surplus accumulated during the Great Depression.

Accepted Answer

Government spending for the war during World War II was approximately 40% of GDP. It was financed through a combination of increased taxes and borrowing, which eventually led to the accumulation of a large national debt.

Question 2

The annual rate of inflation is typically measured by&#10;A) a percentage increase in the price of gasoline and other basic commodities.&#10;B) the difference in the Consumer Price Index from one year to the next.&#10;C) the percentage change in the Consumer Price Index.&#10;D) the increase in the real GDP.

Accepted Answer

The annual rate of inflation is typically measured by the percentage change in the Consumer Price Index (CPI). The CPI measures the average price level of a basket of goods and services consumed by households, and the percentage change reflects the percentage increase in the cost of that basket from one year to the next. This is the most commonly used measure of inflation because it reflects the prices of a broad range of goods and services, not just a few basic commodities like gasoline.

Question 3

Which group of people is likely to be the most concerned about inflation?&#10;A) Individuals whose wages are indexed to the rate of inflation.&#10;B) Businesses selling goods that are relatively price inelastic.&#10;C) Retirees on a fixed income.&#10;D) Corporations with a significant degree of monopoly power.

Accepted Answer

Retirees on a fixed income are likely to be the most concerned about inflation as it erodes the purchasing power of their savings and reduces the value of their fixed income. Individuals whose wages are indexed to the rate of inflation may be less concerned as their income will automatically adjust to account for inflation. Businesses selling goods that are relatively price inelastic may be able to pass on the increased costs to consumers without a significant impact on demand. Corporations with a significant degree of monopoly power may be able to set prices to account for inflation and maintain their profits.

Question 4

Inflation that is driven by the rising cost of inputs including wages and salaries is called&#10;A) demand-pull inflation.&#10;B) cost push inflation.&#10;C) stagflation.&#10;D) profit push inflation.

Accepted Answer

Cost push inflation is driven by the rising cost of inputs such as wages and salaries. This leads to an increase in the cost of production which, in turn, leads to higher prices for consumers. Demand-pull inflation, on the other hand, is caused by an increase in demand for goods and services that outstrips the supply, leading to higher prices. Stagflation is a situation where there is high inflation and high unemployment. Profit push inflation is not a commonly used term and is not a recognized type of inflation.

Question 5

During World War II, the government imposed legal controls on prices. As a result there was&#10;A) no inflation at all.&#10;B) repressed inflation.&#10;C) stagflation.&#10;D) demand-pull inflation.

Accepted Answer

Legal controls on prices during World War II led to repressed inflation, as prices were artificially held down below their market equilibrium levels. This resulted in an accumulation of pent-up demand for goods and services, which led to prices rising rapidly once the controls were lifted after the war.

Question 6

The Keynesian explanation of inflation is that it is caused by&#10;A) aggregate demand rising faster than aggregate supply.&#10;B) aggregate supply rising faster than aggregate demand.&#10;C) an expansion of the money supply.&#10;D) rising costs of production during a time of deficient aggregate demand.

Accepted Answer

The Keynesian explanation of inflation is that it is caused by aggregate demand rising faster than aggregate supply.

Question 7

A prominent conservative view of inflation is that it is caused by&#10;A) high input costs, included high wages and salaries.&#10;B) a deficiency of aggregate demand.&#10;C) productivity rising faster than wages.&#10;D) excess aggregate demand.

Accepted Answer

The answer of A prominent conservative view of inflation is...

Question 8

The term, &#34;stagflation,&#34; refers to&#10;A) inflation accompanied by low unemployment.&#10;B) inflation at a time of excess aggregate demand.&#10;C) inflation accompanied by high unemployment.&#10;D) inflation caused by an expansion of the money supply.

Accepted Answer

Stagflation refers to a situation where there is a combination of stagnant economic growth (low or no real GDP growth) and high unemployment, along with inflation. This is in contrast to traditional economic theory, where inflation is generally seen as a sign of a growing economy, with low unemployment and high aggregate demand. Stagflation is considered an unusual and difficult-to-manage economic phenomenon, and there is no clear consensus on its causes or solutions.

Question 9

Keynesian theory predicts that inflation&#10;A) will rise during expansions and rise during recessions.&#10;B) will fall during expansions and rise during recessions.&#10;C) will fall during expansions and fall during recessions.&#10;D) will rise during expansions and fall during recessions.

Accepted Answer

According to Keynesian theory, inflation will rise during expansions as demand for goods and services increases, leading to upward pressure on prices. However, during recessions, inflation is expected to fall as demand decreases, putting downward pressure on prices. Therefore, the correct answer is D, as inflation is predicted to rise during expansions (when the economy is growing) and fall during recessions (when the economy is contracting).

Question 10

The phenomenon of inflation during recessions&#10;A) is explained by progressive economists as &#34;demand-pull&#34; inflation.&#10;B) does not occur.&#10;C) is explained by conservative economists as &#34;cost-push&#34; inflation.&#10;D) is caused by wage and price controls.

Accepted Answer

Conservative economists explain inflation during recessions as cost-push inflation, which occurs when the cost of producing goods and services increases, leading to an increase in prices. During a recession, there may be supply chain disruptions, causing a decrease in the supply of goods and services, which can increase their costs and lead to inflation.

Question 11

The U.S. government implemented wage and price controls during World War II because&#10;A) there was a significant increase in the production of consumer goods.&#10;B) there was a significant reduction in the production of consumer goods.&#10;C) there was a major increase in demand by government for consumer goods.&#10;D) consumer goods manufacturers were worried about falling prices of consumer goods.

Accepted Answer

The answer of The U.S. government implemented wage and price...

Deck 14: Inflation