Question 1

If nominal income increases, then real income
A) increases.
B) increases if the price index falls.
C) increases if the percent increase in price index rises by more than the percent change in nominal income.
D) increases if you buy only the goods included in the consumer price index CPI) and the majority of those goods get cheaper.
E) decreases.

Accepted Answer

The answer of If nominal income increases, then real income
A)...

Question 2

You are offered two jobs, one in Richmond, Virginia, paying $67,000, and one in San Diego, California, paying $79,000. The price index in Richmond is 104.5; in San Diego it is 132.3. If real wages are the only consideration, then you would
A) be indifferent between the two jobs because the real wages would be about the same within 2 percent).
B) definitely take the job in Richmond because the real wage is higher there.
C) definitely take the job in San Diego because the real wage is higher there.
D) likely take the job in Richmond because there is a Federal Reserve bank there and it would control inflation in the area.
E) likely take the job in San Diego, because better weather is directly correlated to real wages.

Accepted Answer

To calculate the real wage for each job, we need to divide the nominal wage by the price index and multiply by 100. For the job in Richmond, the real wage would be 67,000/104.5 * 100 = $64,067. For the job in San Diego, the real wage would be 79,000/132.3 * 100 = $59,642. Therefore, the job in Richmond has a higher real wage and would be the better choice based on this consideration alone.

Question 3

If Robert was earning $10,000 and now earns $11,500, then
A) Robert's real income must have risen.
B) Robert's real wage has increased, but we can't tell about his nominal wage.
C) Robert could suffer from money illusion if prices increase by 15 percent or more.
D) Robert could experience menu costs if the items on the "value menu" increase in price.
E) Robert will be confused about relative price increases and inflation.

Accepted Answer

The answer of If Robert was earning $10,000 and now...

Question 4

Typically if real wages fall, the quantity demanded of labor rises. If workers agree to 3 percent wage increases for a four-year period and inflation is more than 3 percent, then, based on this information alone,
A) workers will have higher real wages because they get paid more.
B) the quantity demanded of labor will increase, because real wages fell.
C) workers must experience money illusion.
D) the quantity demanded of labor will fall.
E) the demand, but not the quantity demanded, for labor will fall.

Accepted Answer

The answer of Typically if real wages fall, the quantity...

Question 5

The signing of long-term wage and price agreements and the relationship to inflation most likely raises the issue of
A) price confusion problems.
B) future price uncertainty.
C) money illusion.
D) consumer price index CPI) heteroscedasticity.
E) deflationary tendencies.

Accepted Answer

Long-term wage and price agreements can create future price uncertainty because the agreed-upon prices may not reflect market conditions or changes in inflation. This can lead to issues such as inflationary pressures.

Question 6

Deflation is occurring in a nation; the implications) of this is/are that
A) both real and nominal wages are rising.
B) both real and nominal wages are falling.
C) if you have no job and have no income, you are better off because things are cheaper.
D) holding nominal wages constant, the real wage would rise.
E) holding nominal wages constant, the real wage would fall.

Accepted Answer

Deflation means a decrease in the overall price level. Holding nominal wages constant, the decrease in prices means that the purchasing power of wages has increased, resulting in a higher real wage.

Question 7

As a business owner, you find that your resource prices are increasing often. Because these costs are rising, you find it necessary to change your prices frequently. This best describes
A) future price uncertainty.
B) menu costs.
C) money illusion.
D) hyperinflation.
E) a price confusion problem.

Accepted Answer

Menu costs refer to the costs associated with changing prices frequently, such as the cost of printing new menus or updating price tags. This scenario perfectly describes the situation where resource prices are increasing often, leading to the need for frequent price changes and incurring menu costs.

Question 8

Milton Friedman, who won the Nobel Prize in Economics, characterized inflation as being "high and variable." These characteristics of inflation create problems because
A) of future price uncertainty.
B) of arbitrage.
C) of the signal emissions problem.
D) deflation could occur.
E) inflation always becomes hyperinflation.

Accepted Answer

High and variable inflation can lead to future price uncertainty, making it difficult for businesses and individuals to plan and make decisions. This can lead to a decrease in investment and economic growth.

Question 9

Inflation is not a problem
A) if it is under 15 percent, as it usually is in the United States.
B) if salaries rise at a slower rate than inflation.
C) if the prices of some goods fall even though the prices of others might be rising.
D) except that when it occurs, it creates uncertainty over future prices along with other possible deleterious effects).
E) and is not preferred when compared to deflation.

Accepted Answer

The answer of Inflation is not a problem
A) if it...

Question 10

Inflation can create uncertainty by making
A) the real value of past payments uncertain.
B) the nominal value of past payments uncertain.
C) the real value of future payments uncertain.
D) the nominal value of future payments uncertain.
E) wages unstable.

Accepted Answer

The answer of Inflation can create uncertainty by making
A) the...

Question 11

Your nominal wage increases by 10 percent, and the overall price level increases by 12 percent. Which statement is correct?
A) If you feel richer, you are experiencing money illusion.
B) You face a price confusion problem.
C) You face a menu costs problem.
D) You would be certain that your real wage had increased.
E) Bureau of Labor Statistics factors would cause you to experience deflation.

Accepted Answer

The answer of Your nominal wage increases by 10 percent,...

Question 12

You are offered two jobs, one in Chicago paying $67,000 and one in Philadelphia paying $79,000. The price index in Chicago is 110.8, and in Philadelphia it is 126.5. If real wages are the only consideration, then
A) you would be indifferent between the two jobs because the real wages would be about the same within 2 percent).
B) you would definitely take the job in Chicago because the real wage is higher there.
C) you would definitely take the job in Philadelphia because the real wage is higher there.
D) you would suffer from money illusion and be conflicted.
E) because there is a direct correlation between the real wage and the nominal wage, the job in Philadelphia is definitely the one to take.

Accepted Answer

To calculate the real wages, we need to divide the nominal wages by the price index and multiply by 100.

Real wage in Chicago = (67,000/110.8) x 100 = $60,470.23
Real wage in Philadelphia = (79,000/126.5) x 100 = $62,451.36

Therefore, the real wage in Philadelphia is higher than in Chicago. Hence, the best choice would be to take the job in Philadelphia.

Question 13

If real income increases, then nominal income
A) increases.
B) increases if the price index falls.
C) rises faster than prices.
D) remains constant but the majority of goods in the consumer price index CPI) get cheaper.
E) decreases.

Accepted Answer

When real income increases, it means that a person can buy more goods and services with their income. This increase in purchasing power leads to a rise in demand for goods and services, which causes an increase in prices (inflation). However, if nominal income (the actual dollar amount) rises faster than prices, then the purchasing power of the income increases even further. Therefore, nominal income would rise faster than prices in this scenario.

Question 14

Deflation
A) automatically implies that, on average, everyone is better off because prices have fallen.
B) is the same as disinflation; it means the rate of inflation has fallen.
C) will make you better off if your nominal wages fall more slowly than prices.
D) will make you better off if your nominal wages fall more rapidly than prices.
E) will make you better off if your real wages fall more rapidly than prices.

Accepted Answer

When there is deflation, everything becomes cheaper, including goods, services, and labor. If nominal wages remain the same, the real wage rate increases because goods and services are cheaper. However, if nominal wages fall more slowly than prices, a worker's real wage has actually increased, providing an increase in purchasing power. Therefore, deflation will make you better off if your nominal wages fall more slowly than prices.

Question 15

You are offered two jobs, one in Chicago paying $67,000 and one in Dallas paying $58,000. The price index in Chicago is 110.8, and in Dallas it is 91.5. If real wages are the only consideration, then you would
A) be indifferent between the two jobs because the real wages would be about the same within 2 percent).
B) definitely take the job in Chicago because the real wage is higher there.
C) definitely take the job in Dallas because the real wage is higher there.
D) suffer from money illusion and be conflicted.
E) suffer from menu costs and be conflicted.

Accepted Answer

The answer of You are offered two jobs, one in...

Question 16

Menu costs of inflation
A) literally mean that restaurants are the most affected by inflation because they are constantly printing new menus.
B) are best described as the costs firms incur by having to change prices either on paper or in the computer.
C) are the costs one incurs when shopping for lower prices.
D) are the costs involved with only those goods whose prices are rising faster than inflation; this basket of goods represents the "menu."
E) mean that because we can choose what goods we consume, we have a menu of inflation from which to choose and we can "opt out" by consuming a different "basket" of consumer goods.

Accepted Answer

Menu costs of inflation refer to the costs incurred by firms when they have to change their prices either on paper or electronically. This may include the cost of printing new menus, updating price tags, or programming new prices into computer systems. It is not specifically limited to restaurants, nor does it involve shopping for lower prices or opting out of consuming certain goods.

Question 17

You get a pay raise and feel richer even though your raise did not keep up with inflation; this is best described as
A) menu costs.
B) price confusion.
C) future price uncertainty.
D) money illusion.
E) nominal income uncertainty.

Accepted Answer

This phenomenon is called money illusion, which is the tendency of people to think of their wealth and income in nominal terms (i.e. the actual dollar amount) rather than in real terms (i.e. accounting for inflation). So even if a pay raise does not keep up with inflation, people may still feel richer because they are focused on the higher dollar amount they are receiving.

Question 18

Inflation creates uncertainty because
A) nominal values of prices and wages are unknown.
B) it rapidly increases output.
C) real interest rates, prices, and wages are unknown.
D) borrowing continues at a rapid pace, creating a "false boom."
E) although price confusion problems are eliminated, the shoe-leather costs are exacerbated.

Accepted Answer

Inflation creates uncertainty because it affects real interest rates, prices, and wages. When inflation is high, people are unsure about the true value of their money, investments, and income. This can lead to instability in the economy and make it difficult for businesses and individuals to make sound financial decisions.

Question 19

Wages are often tied to expected rates of inflation; thus, one reason why inflation is important is that
A) when wages rise faster than inflation, companies lose money.
B) when wages rise slower than inflation, workers suffer but corporate profits increase.
C) inflation creates uncertainty about costs and prices, which affects both employees and employers.
D) all inflation will eventually lead to hyperinflation, political instability, and war.
E) menu costs mean restaurants have to print new menus, which is costly and unpleasant.

Accepted Answer

Inflation can create uncertainty about costs and prices, affecting both employees and employers. This uncertainty can make it difficult for companies to make long-term plans, including setting wages, and can lead to decreased consumer and investor confidence.

Question 20

You have to pay costs for your business now, but you also have to enter into contracts to pay wages and supply costs in the future. If inflation occurs, the best term for the problem that arises in this case is
A) menu costs.
B) price confusion.
C) future price uncertainty.
D) deflationary price pressures.
E) present value/future value uncertainty.

Accepted Answer

Future price uncertainty refers to the uncertainty businesses face when entering into contracts to pay wages and supply costs in the future. If inflation occurs, the cost of these services and supplies may increase, thereby impacting the business's ability to meet its financial obligations. Menu costs refer to the costs associated with changing prices to reflect inflation, while price confusion and deflationary price pressures are not directly relevant to this scenario. Present value/future value uncertainty relates to the uncertainty businesses face when trying to calculate the value of future cash flows.

Quiz 8: The Price Level and Inflation

If nominal income increases, then real income

You are offered two jobs, one in Richmond, Virginia, paying $67,000, and one in San Diego, California, paying $79,000. The price index in Richmond is 104.5; in San Diego it is 132.3. If real wages are the only consideration, then you would

If Robert was earning $10,000 and now earns $11,500, then

Typically if real wages fall, the quantity demanded of labor rises. If workers agree to 3 percent wage increases for a four-year period and inflation is more than 3 percent, then, based on this information alone,

The signing of long-term wage and price agreements and the relationship to inflation most likely raises the issue of

Deflation is occurring in a nation; the implications) of this is/are that

As a business owner, you find that your resource prices are increasing often. Because these costs are rising, you find it necessary to change your prices frequently. This best describes

Milton Friedman, who won the Nobel Prize in Economics, characterized inflation as being "high and variable." These characteristics of inflation create problems because

Inflation is not a problem

Inflation can create uncertainty by making

Your nominal wage increases by 10 percent, and the overall price level increases by 12 percent. Which statement is correct?

You are offered two jobs, one in Chicago paying $67,000 and one in Philadelphia paying $79,000. The price index in Chicago is 110.8, and in Philadelphia it is 126.5. If real wages are the only consideration, then

If real income increases, then nominal income

Deflation

You are offered two jobs, one in Chicago paying $67,000 and one in Dallas paying $58,000. The price index in Chicago is 110.8, and in Dallas it is 91.5. If real wages are the only consideration, then you would

Menu costs of inflation

You get a pay raise and feel richer even though your raise did not keep up with inflation; this is best described as

Inflation creates uncertainty because

Wages are often tied to expected rates of inflation; thus, one reason why inflation is important is that

You have to pay costs for your business now, but you also have to enter into contracts to pay wages and supply costs in the future. If inflation occurs, the best term for the problem that arises in this case is