Deck 7: Inflation

Question 1

Inflation is measured by an increase in:

A)homes, autos and basic resources.
B)prices of all products in the economy.
C)the consumer price index (CPI).
D)none of these.

Answer 1

the consumer price index (CPI).

Question 2

Which one of the following groups benefits from inflation?

A)Borrowers.
B)Savers.
C)Landlords.
D)Lenders.

Answer 2

Borrowers.

Question 3

Suppose that last year you borrowed $100 at 5 percent interest to purchase a $100 pair of Nike cross-training shoes. This year you repaid the bank with interest. If the inflation rate was 10 percent last year, your purchase of the shoes would:

A)make you an inflation winner as you saved $5 on the shoes.
B)make you an inflation loser as you paid $5 more than you should have for the shoes.
C)not be affected at all by the inflation rate.
D)be taxed according to COLA adjustments.
E)make you an inflation loser because of bracket creep.

Answer 3

make you an inflation winner as you saved $5 on the shoes.

Question 4

The best definition of inflation is a(n):

A)temporary increase in prices.
B)increase in the price of one important commodity such as food.
C)persistent increase in the general level of prices as measured by a price index.
D)increase in the purchasing power of the dollar.

Question 5

Inflation is an increase in:

A)prices of all products in the economy.
B)homes, autos and basic resources.
C)the general price level of products.
D)none of these.

Question 6

Suppose that the consumer price index (CPI)was 160 in Year X and 166 in Year Y, inflation during Year Y was approximately:

A)zero; prices were stable.
B)3.8 percent.
C)6 percent.
D)66 percent.

Question 7

Suppose that the consumer price index of a country was 160 at Year X and 168 at the end of Year Y. What was the country's inflation rate during Year Y?

A)5 percent.
B)8 percent.
C)60 percent.
D)68 percent.

Question 8

Which of the following is true about inflation?

A)Inflation promotes social harmony by uniting people against the government.
B)Inflation is more damaging if it is anticipated.
C)Accurate anticipation of inflation is possible for everyone who is well informed about economic events.
D)Those who lend money at a rate below the rate of inflation suffer economic losses.
E)If people accurately anticipate inflation, their actions will prevent it.

Question 9

Inflation:

A)reduces the cost-of-living of the typical worker.
B)is measured by changes in the cost of a typical market basket of goods between time periods.
C)causes the purchasing power of a dollar to rise.
D)has no effect on real income.

Question 10

Losers from inflation include:

A)savers and borrowers.
B)landlords and the government.
C)borrowers and the government.
D)those on a fixed income and borrowers.
E)those on a fixed income and savers.

Question 11

Which of the following correctly defines inflation?

A)An increase in the price of a particular good or service.
B)An increase in the general (average)price level of goods and services in the economy.
C)The growth rate in real GDP.
D)None of the above.

Question 12

If the consumer price index (CPI)in Year X was 300 and the CPI in Year Y was 325, the rate of inflation for Year Y was:

A)325 percent.
B)25 percent.
C)5 percent.
D)8 percent.

Question 13

In which of the following years was inflation in the United States the highest?

A)1960.
B)1970.
C)1980.
D)1990.
E)2007.

Question 14

Inflation is defined as an increase in:

A)real wages of workers.
B)real GDP.
C)the average price level.
D)all consumer products.

Question 15

Those hurt by inflation include:

A)labor unions with COLA clauses.
B)borrowers.
C)savers.
D)owners of real estate.
E)owners of precious metals, antiques, and works of art.

Question 16

An increase in the general price level is termed:

A)the Consumer Price Index.
B)inflation.
C)deflation.
D)stagflation.
E)nominal pricing.

Question 17

Tina Eckstrom and her husband bought a deferred annuity that started paying them $700 a month in retirement benefits. They, along with millions of other people who live on fixed incomes, are examples of:

A)those who are responsible for inflation.
B)the big winners from inflation.
C)the big losers from inflation.
D)the paradox of thrift.
E)stock market losers.

Question 18

Union contracts with built-in cost-of-living adjustments and home mortgages that vary with the rate of inflation are:

A)inappropriate ways of combating inflation.
B)examples of bracket creep.
C)means of implementing fiscal policy.
D)steps that can be taken to decrease the adverse impacts of inflation.
E)examples of failed discarded policies of the 1970s.

Question 19

Which of the following is true of inflation?

A)It is an increase in the general price level of goods and services.
B)The purchasing power of money increases as the result of inflation.
C)Inflation is similar to interest payments on future money income, such as pensions and receipts from outstanding loans.
D)Inflation has no effect on real income.

Question 20

In periods of high inflation,

A)people want to hold on to as much money as possible.
B)the purchasing power of money is decreasing.
C)nobody wants to work and earn income.
D)low nominal interest rates are likely to result.
E)nobody wants to buy goods and services.

Question 21

The Consumer Price Index compares the:

A)prices of all goods and services in the economy compared to the prices of those goods and services in a base year.
B)prices of consumer goods and services that a household purchases to the prices of those goods and services purchased in a base year.
C)prices of producer goods and services that are made for consumers to the prices of those goods and services in a base year.
D)prices of goods and services that are purchased by producers to the prices of those goods and services in a base year.
E)prices of goods and services that are purchased by consumer manufacturers to the prices of those goods and services in a base year.

Question 22

According to the Bureau of Labor Statistics' survey, which category represents the largest expense for the typical urban family?

A)Housing.
B)Food and beverages.
C)Transportation.
D)Medical care.

Question 23

One way the consumer price index (CPI)differs from the GDP chain price index is that it:

A)includes only purchases of items bought by typical urban consumers.
B)uses only current year quantities.
C)is based on all final goods and services.
D)includes only services.

Question 24

Suppose we shopped for a basket of goods in Year 1 and it cost $350. Suppose the same basket of goods adds up to $385 in Year 2. If we use Year 1 as a base year, what would be the Year 2 CPI?

A)35.
B)90.
C)100.
D)110.
E)135.

Question 25

If the consumer price index in Year 1 was 200 and the CPI for Year 2 was 230, the rate of inflation was:

A)15 percent.
B)7.5 percent.
C)30 percent.
D)230 percent.

Question 26

Suppose a market basket of goods and services costs $400 in the base year and the consumer price index (CPI)is currently 125. This indicates the price of the market basket of goods is now:

A)$275.
B)$425.
C)$500.
D)$525.

Question 27

Suppose the consumer price index (CPI)stands at 250 this year. If the inflation rate is 10 percent, then next year's CPI will equal:

A)250.
B)260.
C)275.
D)500.

Question 28

The salary of the president of the United States in 2000 was $400,000. In 1940, the president's salary was $75,000. If the Consumer Price Index was 8.1 in 1940 and 100 in 2000, the 1940 presidential salary measured in terms of the purchasing power of the dollar in 2000 would be:

A)less than $75,000.
B)less than $400,000.
C)approximately $668,850.
D)approximately $926,000.

Question 29

Suppose hypothetically that the consumer price index (CPI)was 150 in Year 1 and was 180 in Year 2. What would be the inflation rate for this period?

A)12 percent.
B)16.7 percent.
C)20 percent.
D)30 percent.

Question 30

Which of the following statements is true ?

A)Deflation is an increase in the general level of prices.
B)The consumer price index (CPI)measures changes in the average prices of consumer goods and services.
C)Disinflation is an increase in the rate of inflation.
D)Real income is the actual number of dollars received over a period of time.
E)The real interest rate equals the nominal rate of interest plus the inflation rate.

Question 31

Suppose the price of banana rises over time and consumers respond by buying fewer bananas. This situation contributes to which bias in the consumer price index?

A)Substitution bias.
B)Transportation bias.
C)Quality bias.
D)Indexing bias.

Question 32

Consider an economy with only two goods: bread and wine. In 1982, the typical family bought 4 loaves of bread at 50¢ per loaf and 2 bottles of wine for $9 per bottle. In Year X, bread cost 75¢ per loaf and wine cost $10 per bottle. The CPI for Year X (using a 1982 base year)is:

A)100.
B)115.
C)126.
D)130.

Question 33

A measure comparing the prices of consumer goods and services that a household typically purchases to the prices of those goods and services purchased in a base year is:

A)the GDP deflator.
B)the consumer price index.
C)the price level.
D)inflation.
E)the base measure.

Question 34

Exhibit 7-1 Consumer Price Index As shown in Exhibit 7-1, the rate of inflation for Year 5 is:

A)4.2 percent
B)5 percent.
C)20 percent.
D)25 percent.

Question 35

If the consumer price index (CPI)in Year 1 was 200 and the CPI in Year 2 was 215, the rate of inflation was:

A)215 percent.
B)15 percent.
C)5 percent.
D)7.5 percent.
E)8 percent.

Question 36

Suppose the consumer price index (CPI)for Year X is 130. This means the average price of goods and services is:

A)currently $130.
B)130 percent more in Year X than in the base year.
C)130 percent more in the base year than in Year X.
D)priced at 30 percent more in Year X than in the base year.

Question 37

Suppose a market basket of goods and services costs $1,000 in the base year and the consumer price index (CPI)is currently 110. This indicates the price of the market basket of goods and services is now:

A)$110.
B)$1,000.
C)$1,100.
D)$1,225.

Question 38

The consumer price index (CPI):

A)adjusts for changes in product quality.
B)includes separate market baskets of goods and services for both base and current years.
C)includes only goods and services bought by typical urban consumer.
D)uses current year quantities of goods and services.

Question 39

Exhibit 7-1 Consumer Price Index As shown in Exhibit 7-1, the rate of inflation for Year 2 is:

A)5 percent.
B)10 percent.
C)20 percent.
D)25 percent.

Question 40

One way the consumer price index (CPI)differs from the GDP chain price index is that the CPI:

A)uses current year quantities of goods and services.
B)includes separate market baskets of goods and services for both base and current years.
C)includes only goods and services bought by typical urban consumers.
D)is bias free.

Question 41

Deflation:

A)was prevalent during the oil shocks of the 1970s.
B)will cause consumers' purchasing power to shrink.
C)has been persistent in the U.S. economy since the Great Depression.
D)none of these.

Question 42

A reduction in the rate of inflation is called:

A)deflation.
B)disinflation.
C)hyperinflation.
D)cost-push inflation.

Question 43

The substitution bias is believed to cause the consumer price index to:

A)overstate the true rate of inflation.
B)understate the true rate of inflation.
C)understate the true GDP deflator.
D)none of these.

Question 44

As inflation drives up prices, people attempt to find substitutes and adjust what they buy. The resulting substitution bias problem causes the CPI to:

A)overstate the impact of higher prices on consumers.
B)consistently underestimate the true inflation rate.
C)omit the benefits of product quality improvements.
D)have larger fluctuations than other price indexes.

Question 45

Exhibit 7-2 Consumer Price Index As shown in Exhibit 7-2, the rate of inflation for Year 3 is:

A)5 percent.
B)10 percent.
C)20 percent.
D)25 percent.

Question 46

Which of the following would understate the consumer price index?

A)Substitution bias.
B)Deteriorating quality of products.
C)Improving quality of products.
D)Law of demand bias.

Question 47

Exhibit 7-2 Consumer Price Index As shown in Exhibit 7-2, the rate of inflation for Year 5 is:

A)5 percent
B)10 percent.
C)20 percent.
D)25 percent.

Question 48

Price indexes like the CPI are calculated using a base year. The term base year refers to:

A)the first year that price data are available.
B)any year in which inflation was higher than 5 percent.
C)the most recent year in which the business cycle hit the trough.
D)an arbitrarily chosen reference year.

Question 49

Disinflation means a decrease in:

A)the rate of inflation.
B)the general level of prices in the economy.
C)the prices of all products in the economy.
D)the circular flow.

Question 50

Exhibit 7-2 Consumer Price Index As shown in Exhibit 7-2, the rate of inflation for Year 2 is:

A)5 percent.
B)10 percent.
C)20 percent.
D)25 percent.

Question 51

As the price of gasoline rose during the 1970s, consumers cut back on their use of gasoline relative to other consumer goods. This situation contributed to which bias in the consumer price index?

A)Substitution bias.
B)Transportation bias.
C)Quality bias.
D)Indexing bias.

Question 52

The base year in the consumer price index (CPI)is:

A)given a value of zero.
B)a year chosen as a reference for prices in all other years.
C)always the first year in the current decade.
D)established by law.

Question 53

Suppose a market basket of goods and services costs $400 in the base year and $500 this year. The consumer price index (CPI)for this year is:

A)25.
B)100.
C)125.
D)500.

Question 54

Suppose that your income during Year X was $50,000, and the CPI for Year X was 150 (base year = Z. Back in Year Z your income was $30,000. Has your real income increased or decreased from Z to year X? By how much?

A)Increased by $5,000.
B)Increased by $3,333.33.
C)Unchanged.
D)Decreased by $3,333.33.
E)Decreased by $5,000.

Question 55

A worker would be hurt least by inflation when the:

A)worker anticipates inflation and increases savings at the bank.
B)worker is protected by a cost-of-living adjustment clause in an employment contract.
C)price level increases but at a decreasing rate.
D)worker is protected by fixed annual increases in wages and benefits in an employment contract.

Question 56

Suppose the price of gasoline rises and consumers cut back on their use of gasoline relative to other consumer goods. This situation would contribute to which bias in the consumer price index?

A)Substitution bias.
B)Transportation bias.
C)Quality bias.
D)Indexing bias.

Question 57

Suppose you received a 5 percent increase in your nominal wage. Over the year, inflation ran about 2 percent. Which of the following is true ?

A)Your real wage increased.
B)Your nominal wage decreased.
C)Both your nominal and real wages decreased.
D)Although your nominal wage rose, your real wage decreased.

Question 58

Deflation refers to a:

A)decreasing relative prices.
B)decreasing price level.
C)slowing down of the rate of inflation.
D)federal government policy of running budget surpluses.

Question 59

Exhibit 7-2 Consumer Price Index As shown in Exhibit 7-2, the rate of inflation for Year 4 is:

A)5 percent.
B)10 percent.
C)19 percent.
D)20 percent.
E)25 percent.

Question 60

Deflation means a decrease in:

A)the rate of inflation.
B)the prices of all products in the economy.
C)homes, autos, and basic resources.
D)the general level of prices in the economy.

Question 61

Suppose you place $10,000 in a retirement fund that earns a nominal interest rate of 8 percent. If you expect inflation to be 5 percent or lower, then you are expecting to earn a real interest rate of at least:

A)1.6 percent.
B)3 percent.
C)4 percent.
D)5 percent.

Question 62

Real income in Year X is equal to:

A)
B)
C)
D)Year X nominal income ×CPI.

Question 63

When the inflation rate rises, the purchasing power of nominal income:

A)remains unchanged.
B)decreases.
C)increases.
D)changes by the inflation rate minus one.

Question 64

Assume that the real rate of interest is 5 percent and a lender charges a nominal interest rate of 15 percent. If a borrower expects that the rate of inflation next year will be 10 percent and the actual rate of inflation next year is 12 percent:

A)neither the borrower nor the lender benefits from inflation.
B)both the borrower and the lender lose from inflation.
C)the borrower benefits from inflation, while the lender loses from inflation.
D)the lender benefits from inflation, while the borrower loses from inflation.

Question 65

Last year the Olsen family earned $70,000. This year their income is $77,000. In an economy with an inflation rate of 8 percent, we can conclude that the Olsen's nominal income:

A)and real income both increased.
B)and real income both decreased.
C)increased, but their real income decreased.
D)decreased, but their real income increased.

Question 66

The real interest rate is defined as the:

A)actual interest rate.
B)fixed-rate on consumer loans.
C)nominal interest rate minus the inflation rate.
D)expected interest rate minus the inflation rate.

Question 67

Last year the Jones family earned $40,000. This year their income is $42,000. In an economy with an inflation rate of 10 percent, which of the following is correct?

A)The Jones' nominal income and real income have both fallen.
B)The Jones' nominal income and real income have both risen.
C)The Jones' nominal income has increased and their real income has fallen.
D)The Jones' nominal income has decreased and their real income has risen.

Question 68

Real income for a given year would be less than nominal income in that year if:

A)the consumer price index was less than 100 in that year.
B)nominal income in that year was greater than nominal income in the previous year.
C)nominal income in that year was less than nominal income in the previous year.
D)the consumer price index was greater than 100 in that year.

Question 69

If the rate of inflation in a given time period turns out to be higher than lenders and borrowers anticipated, then the effect will be:

A)no change in the distribution of wealth between lenders and borrowers.
B)a net gain in purchasing power for lenders relative to borrowers.
C)a redistribution of wealth from borrowers to lenders.
D)a redistribution of wealth from lenders to borrowers.

Question 70

Demand-pull inflation is associated with:

A)decreasing total spending (demand).
B)increasing total spending (demand).
C)decreasing costs of production (supply).
D)increasing costs of production (supply).

Question 71

If the nominal interest rate is 5 percent and there is no inflation, then the real interest rate:

A)exceeds 5 percent.
B)is less than 5 percent.
C)is 5 percent.
D)is zero.

Question 72

The CPI (using a 2000 base year)for 1965 is 26.0. Suppose a household's annual take-home pay in 1965 was $8,320. What would be an equivalent home pay in 2000?

A)$10,483.
B)$21,632.
C)$23,680.
D)$32,000.

Question 73

If the inflation rate exceeds the nominal rate of interest,

A)the real interest rate is negative.
B)lenders lose.
C)savers lose.
D)all of these.

Question 74

Assume that the real rate of interest is 5 percent and a lender charges a nominal interest rate of 15 percent. If a borrower expects that the rate of inflation next year will be 10 percent and the actual rate of inflation next year is 10 percent,

A)the lender benefits from inflation, while the borrower loses from inflation.
B)the borrower benefits from inflation, while the lender loses from inflation.
C)neither the borrower nor the lender benefits from inflation.
D)both the borrower and the lender lose from inflation.

Question 75

The real interest rate can be expressed as the:

A)nominal interest rate minus the real interest rate.
B)inflation rate minus the nominal interest rate.
C)nominal interest rate minus the inflation rate.
D)nominal interest rate plus the inflation rate.

Question 76

Which of the following is correct?

A)People whose nominal incomes rise faster than the rate of inflation gain purchasing power.
B)Real income equals nominal income divided by the CPI as a decimal.
C)The percentage change in real income equals the percentage change in nominal income minus the percentage change in CPI.
D)All of these.

Question 77

Suppose your nominal income this year is 5 percent higher than last year. If the inflation rate for the period was 3 percent, then your real income was:

A)increased by 1.67 percent.
B)increased by 2 percent.
C)increased by 8 percent.
D)decreased by 0.6 percent.

Question 78

If the rate of inflation in a given time period turns out to be lower than lenders and borrowers anticipated, then the effect will be:

A)a redistribution of wealth from borrowers to lenders.
B)a redistribution of wealth from lenders to borrowers.
C)a net loss in purchasing power for lenders relative to borrowers.
D)a net gain in purchasing power for borrowers relative to lenders.

Question 79

If the rate of inflation in a given time period turns out to be higher than lenders and borrowers anticipated, then the effect will be:

A)a redistribution of wealth from borrowers to lenders.
B)a net gain in purchasing power for lenders relative to borrowers.
C)no change in the distribution of wealth between lenders and borrowers.
D)none of these.

Question 80

Consider borrowers and lenders who agree to loans with fixed nominal interest rates. If inflation is higher than what the borrowers and lenders expected, then who benefits from lower real interest rates?

A)Only the borrowers benefit.
B)Only the lenders benefit.
C)Both borrowers and lenders benefit.
D)Neither borrowers nor lenders.