Question 1

Which of the following decades was characterized by the highest inflation rate in the United States?

Accepted Answer

The 1970s had the highest inflation rate in the United States, with an average annual inflation rate of 7.4%. This was due to a combination of factors, including rising oil prices, government spending, and expansionary monetary policy.

Question 2

What is the effect of inflation on the economy?

Accepted Answer

Unanticipated inflation creates more problems than anticipated inflation because it leads to unexpected transfers of real income and wealth. It also makes it difficult for individuals and businesses to plan for the future, causing uncertainty and leading to potentially inefficient decision making. Additionally, inflation can reduce the value of savings and fixed-income assets, such as bonds, which can harm investors and retirees.

Question 3

If the CPI is 200, then the price level has _____ since the base year.

Accepted Answer

The Consumer Price Index (CPI) measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. A CPI of 200 means that the price level has increased by 100% from the base year, effectively doubling.

Question 4

Suppose inflation is expected to be 5 percent next year, and you and your employer agree to a 6 percent increase in your nominal, or monetary, wage. If inflation turns out to be 5%, what is your real wage increase?

Accepted Answer

The real wage increase is calculated by subtracting the inflation rate from the nominal wage increase. Therefore, a 6 percent nominal increase minus 5 percent inflation equals a 1 percent real wage increase.

Question 5

Inflation can be caused _____

Accepted Answer

Inflation can be caused by both increases in aggregate demand (demand-pull inflation) or decreases in aggregate supply (cost-push inflation). Therefore, the best choice is E which includes both options.

Question 6

The quantity and quality of data used to measure inflation varies across countries because of _____

Accepted Answer

The quantity and quality of data used to measure inflation can vary because some countries may sample fewer products and focus on measuring prices only in the capital city, which might not accurately reflect the nationwide inflation rate.

Question 7

From 2005 to 2011, _____ experienced deflation.

Accepted Answer

Japan experienced deflation from 2005 to 2011. This period is known as the "lost decade" for Japan's economy, characterized by slow growth and falling prices.

Question 8

Which of the following is true about U.S. history prior to the 1950s?

Accepted Answer

The answer of Which of the following is true about...

Question 9

Suppose inflation is expected to be 5 percent next year, and you and your employer agree to a 6 percent increase in your nominal, or monetary, wage. If inflation turns out to be 5%, what is your nominal wage increase?

Accepted Answer

If inflation turns out to be 5%, then your real wage increase (the increase in purchasing power) is 1% (6%-5%). However, the question specifically asks for your nominal wage increase, which is the increase in dollars that you will receive. Therefore, your nominal wage increase is still 6%.

Question 10

Inflation _____

Accepted Answer

Inflation erodes confidence in the value of the dollar over the long term, as it decreases the purchasing power of the dollar. When inflation rises, people may start to lose faith in the value of the currency, leading to decreased investment and economic instability.

Question 11

Cost-push inflation _____

Accepted Answer

Cost-push inflation results in a movement along the aggregate demand curve because it is caused by an increase in the costs of production, which shifts the aggregate supply curve to the left, not by changes in aggregate demand. This type of inflation is not caused by the same factors that lead to demand-pull inflation, which is typically caused by an increase in aggregate demand.

Question 12

Suppose inflation is expected to be 5 percent next year, and you and your employer agree to a 6 percent increase in your nominal, or monetary, wage. If inflation turns out to be 6%, what is your real wage increase?

Accepted Answer

Your real wage increase is 0 percent because the increase in your nominal wage (6 percent) is exactly offset by the inflation rate (6 percent), leaving no change in your purchasing power.

Question 13

If the CPI in the United States was 150 in 2003 and 160 in 2004, the inflation rate over the year was_____

Accepted Answer

The inflation rate can be calculated using the formula:

Inflation rate = ((CPI in the current period - CPI in the previous period) / CPI in the previous period) x 100%

Using this formula, we get:

Inflation rate = ((160 - 150) / 150) x 100%
Inflation rate = (10/150) x 100%
Inflation rate = 6.67% (rounded to 7%)

Therefore, the inflation rate over the year was approximately 7 percent. None of the other options are close to this value.

Question 14

Since World War II, the consumer price index (CPI) has increased by an average of _____

Accepted Answer

Since World War II, the average annual increase in the consumer price index (CPI) has been approximately 3.5 percent per year.

Question 15

The consumer price index measures _____

Accepted Answer

The consumer price index measures the cost of a fixed market basket of consumer goods and services produced in the U.S. economy.

Question 16

Exhibit 7.1
 
-Refer to Exhibit 7.1, which shows the aggregate demand and aggregate supply curves of an economy. In the graph below, the rise in the price levels from P₁ to P₂ is a result of _____

Accepted Answer

Demand-pull inflation occurs when aggregate demand in an economy outpaces aggregate supply, leading to an increase in the price level. This is typically represented by a rightward shift in the aggregate demand curve, causing the price level to rise from P₁ to P₂.

Question 17

Suppose inflation is expected to be 5 percent next year, and you and your employer agree to a 6 percent increase in your nominal, or monetary, wage. If inflation turns out to be 7%, what is your real wage increase?

Accepted Answer

Inflation had a greater-than-expected increase of 2%, which erodes the real value of your wage increase. This means that your real wage increase is actually less than the agreed-upon nominal wage increase of 6%, resulting in a decrease of 1% in your purchasing power. Therefore, the correct answer is (B) -1 percent.

Question 18

Inflation rates differ across regions mostly because of differences in _____

Accepted Answer

Housing prices vary greatly across different regions, which can impact the overall inflation rate. Other factors such as food costs and prices for durable goods may also fluctuate between regions, but housing prices are typically a major contributor. The base year and revisions to the data are not relevant factors in explaining regional differences in inflation rates.

Question 19

Since the end of World War II, the U.S. price level has _____

Accepted Answer

Since the end of World War II, the U.S. price level has increased significantly, more than doubling. An increase tenfold is a more accurate reflection of the change over the decades, considering the cumulative effects of inflation over time.

Question 20

One of the most widely reported measures of inflation is the _____

Accepted Answer

The consumer price index (CPI) is the most widely reported measure of inflation, as it reflects changes in the prices of goods and services purchased by households. This measure is used by policymakers, economists, and the general public to gauge the rate of inflation over time.

Quiz 7: Unemployment and Inflation.