Question 1

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. Nominal values may be known, but their real value in terms of purchasing power is uncertain. This can make it difficult for individuals and businesses to plan for the future and make informed decisions.

Question 2

The housing crisis has some roots in inflation because
A) new houses were new goods and services and the consumer price index CPI) didn't measure them.
B) builders confused inflation with an increase in demand and hence overbuilt, which was a price confusion problem.
C) there were menu costs associated with higher housing prices.
D) money illusion occurred when builders thought that real prices were rising.
E) money illusion occurred when housing buyers thought real wages were rising.

Accepted Answer

Builders confused inflation with an increase in demand and hence overbuilt, which led to a surplus of housing and ultimately a housing crisis. The other options are not directly related to the role of inflation in the housing crisis.

Question 3

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 creates uncertainty about future prices, making it difficult for individuals and businesses to plan and make critical economic decisions. This uncertainty can lead to decreased investment, lower economic growth, and other negative economic impacts.

Question 4

Wanda owns a store and has not had to raise prices recently-and now her store has more customers. Which statement is correct?
A) This can be troublesome because she faces a "menu costs" problem because she must not have increased prices fast enough.
B) This can be troublesome because she faces a price confusion problem: she doesn't know if the extra business means that she should open another store, or if the crowds are a result of inflation, which has caused all consumers to buy at a faster rate.
C) This can be troublesome because she faces a future price uncertainty problem because she doesn't know how much to increase her prices now or in the future.
D) It can't be troublesome; it can only be good.
E) This can be troublesome because too many customers generate deflationary pressures for all businesses.

Accepted Answer

The statement mentions that Wanda has not had to raise prices and now has more customers, which is generally a good sign for a business. None of the other options are applicable or accurate.

Question 5

According to the price confusion problem, if the price of a product increases, then
A) the market demand has increased, and the firm's output should increase.
B) the market demand has increased, and the firm's output should decrease.
C) the price increase is due to inflation, and the firm's output should increase.
D) the price increase is due to inflation, and the firm's output should decrease.
E) prices as a whole fall, and the firm's output should increase.

Accepted Answer

The answer of According to the price confusion problem, if...

Question 6

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

Inflation creates uncertainty over future prices, which can lead to various negative effects on the economy, such as reduced purchasing power and investment. The other options either incorrectly characterize the impacts of inflation or present scenarios that do not negate the problems caused by inflation.

Question 7

The distinction between price confusion problems and menu costs is that
A) price confusion results from confusion between relative demand and inflationary pressures, whereas menu costs have to do with people confusing changes in nominal and real wages.
B) menu costs result from confusion between relative demand and inflationary pressures, whereas price confusion has to do with people confusing changes in nominal and real wages.
C) price confusion results from confusion between relative demand and inflationary pressures, whereas menu costs relate to producers changing prices, typically during inflationary periods.
D) menu costs occur during deflation, whereas price confusion problems occur during inflation.
E) menu costs only affect the food industry, whereas price confusion problems occur in high-tech industries.

Accepted Answer

Price confusion problems arise due to confusion between relative demand and inflation, leading to difficulties in setting and changing prices. On the other hand, menu costs relate to the costs incurred by producers in changing prices, which can be particularly high during inflationary periods. Thus, option C is the correct answer as it correctly distinguishes between price confusion and menu costs.

Question 8

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 surrounding the future prices of goods and services. In this case, if inflation occurs, the costs for wages and supplies may increase, creating uncertainty for the business owner who has already entered into contracts to pay those costs in the future. This uncertainty can make it difficult to plan and manage cash flow effectively.

Question 9

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

In deflation, there is a decrease in the general price level of goods and services. This means that, holding nominal wages constant, the purchasing power of wages increases, resulting in an increase in real wages. However, it is important to note that deflation can also lead to a decrease in economic activity and employment, which can have negative effects on individuals and the economy as a whole.

Question 10

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

When your nominal wage increases by 10 percent but the overall price level increases by 12 percent, your real wage (purchasing power) actually decreases. If you feel richer because of the nominal wage increase, you are experiencing money illusion, which is the tendency to think of currency in nominal, rather than real, terms. This means you are not accounting for the effects of inflation on your purchasing power.

Question 11

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 incurred by firms in changing their prices due to changing market conditions. In this case, the rising resource prices necessitate frequent price changes, which incur menu costs for the business owner.

Question 12

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 13

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

Robert's nominal wage has increased from $10,000 to $11,500, which is a 15% increase. If prices increase by 15% or more, the purchasing power of his income could actually decrease or stay the same, leading to a situation where he might suffer from money illusion, thinking he is better off simply because his nominal wage has increased, without considering the real purchasing power of his income. Choices A, B, D, and E are incorrect because they either misinterpret the concept of real vs. nominal wages, or introduce concepts (menu costs, confusion about inflation) not directly related to the scenario described.

Question 14

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 15

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 scenario is best described as money illusion, where an individual feels richer due to an increase in nominal income even though the real purchasing power of their income has not increased due to inflation.

Question 16

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

Deflation means prices are falling, which can lead to a decrease in demand and economic activity. However, if a person's nominal wages (the amount they are paid) also fall but at a slower rate than prices, their purchasing power can actually increase. This means they can buy more goods and services despite the lower prices, which makes them better off.

Question 17

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

If real income increases, then the purchasing power of an individual also increases. This means that the individual can buy more goods and services with the same income. Therefore, nominal income will increase but at a slower rate than the increase in real income. This is because prices also tend to rise over time, but real income adjusts for inflation while nominal income does not. Therefore, option C is the correct answer as nominal income will rise at a slower rate than prices.

Question 18

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 as they lock in prices and wages for an extended period of time. This can create problems if there are unexpected changes in the economy or inflation rates, which could cause prices to either rise or fall.

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 creates uncertainty about costs and prices, which affects both employees and employers. When inflation occurs, businesses may not be able to accurately predict expenses or revenues, which can lead to decreased profits and difficulties in budgeting. This uncertainty can also affect wages and negotiations between employers and employees.

Question 20

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 in the computer due to inflation. This could include the costs of printing and distributing new menus or updating prices in a digital database. Option A, C, D, and E do not accurately define menu costs of inflation.

Quiz 8: The Price Level and Inflation

Inflation creates uncertainty because

The housing crisis has some roots in inflation because

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

Wanda owns a store and has not had to raise prices recently-and now her store has more customers. Which statement is correct?

According to the price confusion problem, if the price of a product increases, then

Inflation is not a problem

The distinction between price confusion problems and menu costs 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

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

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

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

If nominal income increases, then real income

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

Inflation can create uncertainty by making

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

Deflation

If real income increases, then nominal income

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

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

Menu costs of inflation