Deck 16: Inflation

Question 1

Deflation is an overall:

A) rise in prices in the economy.
B) decline in prices in the economy.
C) rise in prices in the economy, excluding those with historically volatile price changes.
D) decline in prices in the economy, excluding those with historically volatile price changes.

Answer 1

decline in prices in the economy.

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

To measure core inflation, the BLS removes goods that:

A) have historically volatile prices.
B) are considered necessities.
C) are luxury goods.
D) are durable and hold a constant value.

Answer 3

have historically volatile prices.

Question 4

Nominal output is the _________ of goods and services, and real output is the _______ of goods and services .

A) dollar value; actual amount
B) actual amount; dollar value
C) actual amount; dollar value with inflation
D) dollar value with inflation; dollar value

Question 5

An overall rise in prices in the economy is called:

A) inflation.
B) deflation.
C) core inflation.
D) core deflation.

Question 6

Which of the following goods' prices are not considered when calculating core inflation?

A) food
B) housing
C) clothing
D) entertainment

Question 7

________ inflation is more stable than __________ inflation, because it ____________.

A) Core; headline; excludes food and gasoline prices
B) Headline; core; excludes food and gasoline prices
C) Core; headline; does not exclude food and gasoline prices
D) Headline; core; does not exclude food and gasoline prices

Question 8

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) collapse.

Question 9

Headline inflation:

A) includes all of the goods the average consumer buys.
B) is based on the CPI basket of goods.
C) is measured using core inflation with the prices of food and gasoline added in.
D) All of these statements are true.

Question 10

Inflation is an overall:

A) rise in prices in the economy.
B) decline in prices in the economy.
C) rise in prices in the economy, excluding those with historically volatile price changes.
D) decline in prices in the economy, excluding those with historically volatile price changes.

Question 11

An overall fall in prices in the economy is called:

A) inflation.
B) deflation.
C) core inflation.
D) core deflation.

Question 12

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

A) Core inflation
B) Headline inflation
C) Overall inflation
D) Nominal inflation

Question 13

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

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

Question 14

Core inflation is all of the following but:

A) a measure of inflation that excludes goods with historically volatile price changes.
B) the BLS's official measure of changes in prices.
C) Both an overall rise in prices in the economy.
D) a measure of inflation that excludes gasoline and food price changes.

Question 15

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

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

Question 16

Core inflation is a measure of:

A) inflation that excludes goods with historically volatile price changes.
B) an overall rise in prices in the economy.
C) the Consumer Price Index with durable goods excluded.
D) the change in the Consumer Price Index with durable goods excluded.

Question 17

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

A) Headline inflation
B) Core inflation
C) Hyper inflation
D) Nominal inflation

Question 18

________ inflation is more stable than __________ inflation, because it excludes food and gasoline prices.

A) Core; headline
B) Headline; core
C) Core; nominal
D) Nominal; core

Question 19

A measure of the average price level for GDP is called the:

A) aggregate price level.
B) national price level.
C) economy price level.
D) total price level.

Question 20

Headline inflation is:

A) core inflation with the prices of food and gasoline added in.
B) limited measure of inflation in the economy.
C) used only by the media for discussing inflation.
D) not a generally accepted measure of inflation.

Question 21

If the economy is represented in the graph shown and is currently at point E₁, then the economy must be in:

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

Question 22

According to the graph shown, what does P on the y-axis stand for?

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

Question 23

If the economy is represented in the graph shown and is currently at point E₂, which action is the Fed most likely to undertake?

A) Expansionary monetary policy, because it will shift AD to the right.
B) Contractionary monetary policy, because it will shift AD to the left.
C) Expansionary monetary policy, because it will shift AD to the left.
D) Contractionary monetary policy, because it will shift AS to the right.

Question 24

If the economy is in a recession, which point in the graph shown would likely represent this?

A) E₁
B) E₂
C) E₃
D) E₄

Question 25

The classical theory of inflation illustrates the relationship among:

A) money supply, output, and the overall level of prices.
B) spending, saving, and the overall price level.
C) savings, investment, and the interest rate.
D) money supply, savings, and investment.

Question 26

The neutrality of money is the idea that:

A) aggregate price levels do not affect real outcomes in the economy.
B) hard money has a neutral effect in the economy.
C) in real terms, it makes no difference who is spending each dollar.
D) virtual money has a neutral effect in the economy.

Question 27

According to the quantity theory of money, changes in the price level are primarily the result of changes in the:

A) quantity of money.
B) unemployment rate.
C) rate of spending.
D) total output.

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) increases spending.

Question 29

The quantity theory of money states explicitly that the:

A) value of money is determined by the overall quantity of money in existence.
B) Real GDP is determined by the money supply.
C) 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 30

If the economy is represented in the graph shown and is currently at point E₁, what could be said about the state of the economy?

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

Question 31

If the economy is represented in the graph shown and is currently at point E₃, what could be said about the state of the economy?

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

Question 32

Price indexes:

A) allow us to convert nominal measures of output into real measures of output.
B) let us measure how much real stuff we get for our money.
C) like the CPI or GDP price deflator are used to measure the aggregate price level.
D) All of these statements are true.

Question 33

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

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

Question 34

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

A) quantity theory of money.
B) money quantity theory.
C) price level theory.
D) level theory of prices.

Question 35

If the economy is represented in the graph shown and is currently at point E₂, what could be said about the state of the economy?

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

Question 36

If the economy is represented in the graph shown and is currently at point E₃, then the economy must be in:

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

Question 37

According to the graph shown, what does 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 38

Price indexes allow us to convert __________ measures of output into _________ measures of output, because an increase in that would mean economic growth.

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

Question 39

The idea that 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 40

If the economy is experiencing an economic boom, which point in the graph shown would likely represent this?

A) E₁
B) E₂
C) E₃
D) E₄

Question 41

If an economy produces 3,000 units of output with a price level of $2 and the money supply (M) is $2,000, velocity is:

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

Question 42

If an economy produces 1,000 units of output with a price level of $5 and the money supply (M) is $1,000, velocity is:

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

Question 43

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) transaction velocity.

Question 44

If an economy produces 2,000 units of output with a price level of $2 and the money supply (M) is $1,000, velocity is:

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

Question 45

If an economy produces 3,000 units of output with a money supply of $500 and a velocity of 9, we know the price level must be:

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

Question 46

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 money will be accepted as a medium of exchange in a given period.

Question 47

If an economy produces 4,000 units of output with a price level of $2 and with a velocity of money of 8, we know that the money supply must be:

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

Question 48

If an economy produces 3,000 units of output with a price level of $2 and with a velocity of money of 12, we know that the money supply must be:

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

Question 49

If an economy produces 5,000 units of output with a price level of $1 and with a velocity of money of 4, we know that the money supply must be:

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

Question 50

If an economy produces 2,000 units of output with a price level of $1 and the money supply (M) is $1,000, velocity is:

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

Question 51

The velocity of money is:

A) how many times the average dollar gets spent per year.
B) the number of transactions in which a typical dollar is used during a year.
C) how many times on average the typical dollar changes hands in an exchange during the year.
D) All of these statements are true.

Question 52

The money supply and velocity of money tell us the:

A) price value of real output.
B) real output.
C) nominal value with inflation accounted for.
D) nominal value of firm output.

Question 53

If an economy produces 2,500 units of output with a money supply of $500 and a velocity of 10, we know the price level must be:

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

Question 54

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 55

If an economy produces 1,000 units of output with a price level of $1 and the money supply (M) is $500, velocity is:

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

Question 56

The quantity equation states:

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

Question 57

According to the quantity theory of money, a decrease in prices would be 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 58

If an economy has a money supply of $200, a velocity of 12, and a price level of $2, the output level must be:

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

Question 59

According to the quantity theory of money, an increase in the money supply leads to:

A) an increase in prices, as there are more dollar bills spent on the same number of goods and services.
B) an increase in prices, as there are the same dollar bills spent on a greater number of goods and services.
C) a decrease in prices, as there are more dollar bills spent on the same number of goods and services.
D) a decrease in price, as there are the same dollar bills spent on a greater number of goods and services.

Question 60

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

A) Velocity of money
B) Money supply
C) Price level
D) Aggregate spending.

Question 61

Cost 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 necessity goods increases suddenly.
D) business cycle becomes sporadic and unpredictable.

Question 62

Temporary changes in the price level caused by changes in the business cycle are called:

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

Question 63

Arguably the most damaging economic consequence of inflation is:

A) high prices.
B) the uncertainty it can create.
C) the adjustment of sticky wages.
D) the erosion of value of real assets.

Question 64

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

A) inflation rate is 10 percent.
B) inflation rate is 5 percent.
C) inflation rate is 2 percent.
D) inflation rate is 20 percent.

Question 65

While the __________ is not important, the _________ can have a big effect on economic behavior.

A) price level; unpredicted change in the price level
B) unpredicted change in the price level; price level
C) price level; predictable change in the price level
D) predictable change in the price level; price level

Question 66

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

A) an increase in P.
B) an increase in V.
C) an increase in Y.
D) a decrease in P.

Question 67

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

A) leads to inflation.
B) causes production to increase.
C) leads to decreased spending.
D) causes each dollar to be spent less often.

Question 68

More recently, the velocity of money was:

A) higher during the housing boom and lower during the recession that followed.
B) lower during the housing boom and higher during the recession that followed.
C) consistently higher than the historical trend since the mid-1980s.
D) consistently lower than the historical trend since the early 1990s.

Question 69

Inflation rates over the last 40 years have generally:

A) decreased around the world.
B) increased around the world.
C) unchanged for developing nations and decreased for developed nations.
D) decreased for developing nations and increased for developed nations.

Question 70

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

A) an increase in P.
B) a decrease in P.
C) an increase in Y.
D) a decrease in Y.

Question 71

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) being penalized via taxes for making more money in dollars, even though real purchasing power hasn't changed at all.
D) labor costs associated with inflation.

Question 72

According to the quantity theory of money, if the economy were facing inflation, the Federal Reserve Bank could combat it by:

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

Question 73

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) being penalized via taxes for making more money in dollars, even though real purchasing power hasn't changed.
D) labor costs associated with inflation.

Question 74

The severe oil shortages of the 1970s in the US created:

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

Question 75

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 76

One of the costs not associated with predictable inflation is:

A) menu costs.
B) shoe-leather costs.
C) tax distortions.
D) labor costs.

Question 77

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 neutrality of money in the long run.
D) All of these statements are true.

Question 78

One of the costs associated with predictable inflation is:

A) tax distortions.
B) budget charges.
C) overheads.
D) the re-distribution of purchasing power.

Question 79

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 necessity goods increases suddenly.
D) business cycle becomes sporadic and unpredictable.

Question 80

Historically, velocity has been:

A) relatively stable, though the recent crisis has temporarily caused some significant changes.
B) relatively stable, though the Great Depression of the 1930s caused some significant fluctuations.
C) in sync with the business cycle, slowing during times of decline and increasing with recovery.
D) in sync with the business cycle, increasing during times of decline and increasing with recovery.