Question 1

Unanticipated inflation can result in:

Accepted Answer

Unanticipated inflation often leads to a redistribution of income and wealth because it can erode the real value of fixed-income assets, benefiting borrowers at the expense of lenders. This is because the money repaid is worth less in real terms than when it was borrowed.

Question 2

Wage and price controls are an example of an incomes policy.

Accepted Answer

Wage and price controls are a key component of the incomes policy, which seeks to regulate and stabilize economic activity by implementing government policies that influence wages, prices, and other incomes.

Question 3

The U.S. government benefits from inflation because:

Accepted Answer

Inflation benefits debtors because it reduces the real value of the money they owe. As a debtor, the U.S. government can repay its debts with money that is worth less than when it was borrowed.

Question 4

A government established agency that controls the nation's money supply is a:

Accepted Answer

A central bank is a government-established agency designed to control and manage a nation's money supply. It sets monetary policy, regulates banks, and can also act as a lender of last resort to financial institutions. Examples of central banks include the Federal Reserve in the United States and the European Central Bank in Europe. The other choices listed do not accurately describe a central bank.

Question 5

If the economy suffers from inflation and unemployment as the result of a supply shock (such as reduction in oil production), expansionary fiscal or monetary policy would reduce unemployment but result in hyperinflation.

Accepted Answer

Expansionary fiscal or monetary policy involves increasing government spending or lowering interest rates, which can help stimulate economic growth and reduce unemployment. However, if the cause of inflation and unemployment is a supply shock (such as a reduction in oil production), increasing demand through fiscal or monetary policy can lead to higher prices and further inflation, potentially even leading to hyperinflation. Therefore, although it may temporarily reduce unemployment, it is not a long-term solution to the underlying problem of a supply shock.

Question 6

The largest component of M1 is:

Accepted Answer

Demand deposits, also known as checking accounts, are the largest component of M1. They represent money that can be easily accessed and used for transactions, making them an important measure of the money supply. Other checkable deposits, travelers' checks, and savings deposits are also part of M1, but their totals are smaller than demand deposits.

Question 7

The M1 money supply consists of:

Accepted Answer

The M1 money supply includes currency (paper money and coins) in circulation, travelers' checks, demand deposits (checking accounts), and other checkable deposits (such as negotiable order of withdrawal accounts).

Question 8

Which of the following is not a function of money?

Accepted Answer

Money is not a standard of profitability. It is a measure of value that is widely accepted in exchange for goods and services. Money serves as a medium of exchange, a unit of account, and a store of value, helping to facilitate transactions and enhance economic efficiency.

Question 9

Inflation refers to:

Accepted Answer

The answer of Inflation refers to:
...

Question 10

Deflation refers to:

Accepted Answer

Deflation specifically refers to a continuing decrease in the general price level, not just a decrease in prices or average prices.

Question 11

The consumer price index (CPI) is:

Accepted Answer

The consumer price index (CPI) measures changes in the cost of living for a typical urban household. It reflects the prices of goods and services that are commonly purchased by consumers, such as food, housing, transportation, and healthcare. It is not a measure of the prices of all goods and services produced in the economy, nor is it a measure of the prices of intermediate goods and services.

Question 12

Inflation can be measured by using:

Accepted Answer

The rate of change of the GDP deflator is a commonly used measure of inflation as it reflects the change in overall prices of goods and services produced within a country. As the GDP deflator takes into account all goods and services produced within an economy, it provides a more comprehensive measure of inflation than other measures such as the average price index, which may only reflect a subset of goods and services.

Question 13

As a result of unanticipated inflation,

Accepted Answer

Unanticipated inflation can lead to higher government revenues through mechanisms like bracket creep in progressive tax systems, where inflation pushes incomes into higher tax brackets, and nominal gains that are taxed. This can improve the government's financial position, making option B correct.

Question 14

Demand deposits are:

Accepted Answer

The answer of Demand deposits are:
...

Question 15

The rate of inflation increases. The government will benefit because:

Accepted Answer

When the rate of inflation increases, the prices of goods and services increase, resulting in an increase in the tax base. This leads to an increase in the amount of tax revenues collected by the government. This is the reason why the government benefits from inflation as it can use the additional revenue collected to finance its expenses without increasing taxes. Therefore, option B is the best choice. Option A is not correct as inflation reduces the value of money, which makes it difficult for the government to repay its debt, and therefore, it is not beneficial for the government to be a creditor in an inflationary environment. Option C is also incorrect as the interest that the government pays on its bonds is fixed, and an increase in inflation will not reduce it. Option D is also incorrect as productivity increases usually reduce the cost of goods and services, and therefore, cause deflation rather than inflation.

Question 16

The consumer price index is not an accurate measure of the cost of living because:

Accepted Answer

The consumer price index does not fully account for changes in the quality of products, meaning that even though the price may remain the same, the quality of the product may have improved or declined, affecting the true cost of living. Choices A, B, and C are all accurate features of how the consumer price index is calculated.

Question 17

An increase in the inflation rate in the United States will:

Accepted Answer

An increase in the inflation rate in the United States makes domestic goods more expensive relative to foreign goods, thus decreasing the relative price of imports.

Question 18

A high and variable rate of inflation can:

Accepted Answer

A high and variable rate of inflation can cause resources to be concentrated on short-run projects, increase economic uncertainty, and decrease the nation's productive capacity as people engage in speculation. Therefore, option D, all of the above, is the best choice.

Question 19

The GDP deflator is:

Accepted Answer

GDP deflator is a measure of the general price level of goods and services produced in the economy. It is calculated as the ratio of nominal GDP (current prices) to real GDP (constant prices). Therefore, the GDP deflator is a weighted average of the prices of all final goods and services produced in the economy. Option A is incorrect since it refers to the CPI, which measures inflation for a typical urban household. Option B is not correct because it refers to the Producer Price Index (PPI). Option D is incorrect because it refers to the Producer Price Index (PPI) or Wholesale Price Index (WPI), which tracks the changes in the prices of intermediate goods and services.

Question 20

The broadest price index is:

Accepted Answer

The GDP deflator is considered the broadest price index as it includes all goods and services produced in an economy, regardless of who produces them or who the intended consumer is. This is in contrast to the CPI, which only measures the prices of goods and services purchased by urban consumers, and the producer price index, which only measures the prices received by producers. The economy-wide deflator is not a commonly used term in economics.

Quiz 14: Inflation: a Monetary Phenomenon