Question 1

Which of the following is an example of the price effect during a period of inflation?

Accepted Answer

The price effect refers to the impact of inflation on the purchasing power of money, where specific prices rise more rapidly than the general price level, affecting consumers who buy those goods.

Question 2

Real income:

Accepted Answer

Real income reflects the purchasing power of money, which means it takes into account inflation and adjusts for changes in prices. Real income determines how much goods and services one can purchase with their income. It is not adjusted for unemployment or stability of the labor force.

Question 3

When a person's nominal income falls in a period of inflation then the person's real income:

Accepted Answer

When a person's nominal income falls during a period of inflation, their real income definitely falls because real income is adjusted for inflation, meaning their purchasing power decreases.

Question 4

Suppose that at the start of this year you got a salary increase of 10 percent from your employer.The prices of the goods and services you typically purchase increase 10 percent during the year.At the end of the year you have experienced on balance:

Accepted Answer

Real income is adjusted for inflation, meaning it reflects the purchasing power of income. If both your salary and the prices of goods and services increase by the same percentage (10% in this case), your nominal income (the actual amount of money you receive) increases, but your real income (the amount of goods and services you can buy with your income) stays the same because the price increase offsets the salary increase.

Question 5

Which of the following is an example of the income effect during a period of inflation?

Accepted Answer

The income effect during a period of inflation refers to the decrease in purchasing power of a fixed income. This means that the individual's real income decreases as prices rise, leading to a decrease in the quantity and quality of goods and services that can be purchased. Option D is the only choice that reflects this income effect by stating that the income is fixed and does not increase even though the price level is rising. Options A, B, and C do not reflect the income effect during a period of inflation.

Question 6

The uncertainty of inflation is likely to affect:

Accepted Answer

Inflation can affect production decisions, as businesses may adjust their output levels in response to changing prices, and consumption decisions, as individuals may alter their spending patterns to account for changes in the cost of goods and services. It can also impact savings, as individuals may seek to save more or less depending on inflation expectations. Finally, it can have a particular impact on the elderly on fixed incomes, as inflation erodes the purchasing power of their savings and income.

Question 7

Ben's nominal annual income in 2009 was $40,000.If the rate of inflation is constant at 10 percent,in order to keep Ben's real income constant,his nominal income in the year 2010 should be:

Accepted Answer

Inflation rate = (New price index - Old price index) / Old price index * 100%
Let x be the nominal income in 2010.
Inflation rate = [(x - 40,000) / 40,000] * 100% = 10%
Simplifying the above equation, we get x = $44,000. 
So, to maintain the same purchasing power, Ben's nominal income in 2010 should be $44,000.

Question 8

During a period of inflation:

Accepted Answer

During a period of inflation, borrowers may benefit because they repay their loans with money that is worth less than when they originally borrowed it. This does not necessarily mean all prices rise uniformly (A), nor does it imply that everyone's real income decreases (C), as the impact of inflation can vary across different sectors and individuals. Option D is incorrect because inflation is characterized by rising, not falling, prices.

Question 9

Suppose the cost of medical care rose 200 percent from 1990 to 2012,and average prices for the economy rose 150 percent.Relative to others,people who purchased medical care experienced a:

Accepted Answer

Since the cost of medical care rose more than the average prices for the economy, people who purchased medical care would have faced a higher price effect, resulting in a lower real income. The wealth effect (change in purchasing power due to changes in real wealth) is not relevant in this scenario.

Question 10

The value of an original painting,held as an asset,increased in value by 100 percent from 1970 to 2012.Suppose during the same period average prices in the economy rose by 150 percent.The owner of the painting,relative to those who do not own paintings,experienced a:

Accepted Answer

The owner of the painting experienced a lower real wealth as a result of the wealth effect. Even though the painting increased in value by 100%, the average prices in the economy rose by a higher percentage (150%), leading to a decrease in the purchasing power of the owner's wealth. The increase in the value of the painting did not fully compensate for the increase in prices.

Question 11

Generally speaking,which of the following groups would tend to gain real income from the wealth effects of inflation?

Accepted Answer

People who own assets that are appreciating faster than the inflation rate would tend to gain real income from the wealth effects of inflation. This is because inflation can cause the value of assets such as real estate, stocks, and commodities to increase, leading to a higher return on investment. The other options, such as holding all assets in cash or having passbook savings accounts, would not necessarily provide a real gain in income due to inflation. Long-term bonds may also lose value if interest rates rise.

Question 12

Suppose a recent college graduate has an annual nominal income of $42,000 for the first year she works.If the annual inflation rate is 5 percent,what salary would she need in the second year to maintain the same real income?

Accepted Answer

To maintain the same real income with a 5% inflation rate, the salary needs to increase by 5% from $42,000. Calculating 5% of $42,000 gives $2,100. Adding this to the original salary gives $44,100 ($42,000 + $2,100).

Question 13

Nominal income must have fallen if real income:

Accepted Answer

Nominal income refers to the amount of money earned in current dollars, without adjusting for inflation or deflation. Real income adjusts nominal income for changes in price level to reflect the actual purchasing power. If real income falls and there is deflation, it implies that the purchasing power of the income has decreased even though prices are falling, suggesting that nominal income must have decreased for real income to fall in a deflationary environment. In all other scenarios, the relationship between nominal income and real income can vary depending on the rate of inflation or deflation relative to the change in nominal income.

Question 14

Inflation acts like a tax because:

Accepted Answer

Inflation redistributes income and wealth by eroding the purchasing power of money, benefiting debtors who repay loans with less valuable money and harming creditors and those on fixed incomes.

Question 15

If the number of dollars you receive every year is the same,but prices are rising,then your nominal income:

Accepted Answer

C) Stays the same but your real income falls. This is because nominal income refers to the amount of money you are paid, which does not change in this scenario. However, real income adjusts for inflation and represents purchasing power. If prices are rising (inflation), but your nominal income remains constant, your real income (purchasing power) decreases.

Question 16

Which of the following is an example of the wealth effect during a period of inflation?

Accepted Answer

The wealth effect refers to the change in consumer spending that results from a change in perceived wealth. In this case, holding money in a savings account that earns 5 percent interest while the price level doubles results in a decrease in real wealth, as the purchasing power of the savings decreases significantly due to inflation.

Question 17

Nominal income:

Accepted Answer

Nominal income is the amount of money income measured in current dollars, meaning it does not account for inflation or changes in the purchasing power of money.

Question 18

The value of a piece of land,held as an asset,increased in value by 200 percent from 1985 to 2012.Suppose during the same period average prices in the economy rose by 165 percent.The owner of the land,relative to those who do not own land,experienced a:

Accepted Answer

The owner of the land experienced a higher real wealth as a result of the wealth effect. The increase in the value of the land exceeds the increase in the average prices in the economy, so the owner's real wealth has increased. This is the result of the wealth effect, which occurs when an individual's perceived wealth increases due to an increase in the value of their assets.

Question 19

Suppose the cost of milk rose 100 percent from 1990 to 2012,and average prices for the economy rose 133 percent.Relative to others,people who purchased milk experienced a:

Accepted Answer

The price of milk rose by 100%, which is less than the average price increase of 133% for the economy. This means that, relative to the overall economy, the real cost of milk decreased, allowing consumers to have a higher real income for milk purchases.

Question 20

Patricia's nominal annual income in 2009 was $60,000.If the rate of inflation is constant at 10 percent,in order to keep Patricia's real income constant,her nominal income in the year 2010 should be:

Accepted Answer

To keep Patricia's real income constant, we need to account for the inflation rate. If the inflation rate is constant at 10 percent, it means that prices of goods and services will increase by 10 percent in 2010 compared to 2009. Hence, Patricia's purchasing power will decrease if her nominal income remains the same.

To maintain Patricia's purchasing power, her nominal income in 2010 should increase by the rate of inflation, which is 10 percent. Therefore, her nominal income in 2010 should be:

Nominal income in 2010 = Nominal income in 2009 + (Nominal income in 2009 x Inflation rate)
Nominal income in 2010 = $60,000 + ($60,000 x 0.1)
Nominal income in 2010 = $66,000

Therefore, the best choice is C) $66,000.

Quiz 10: The Business Cycle