Deck 32: Inflation

Question 1

Headline inflation is:

A)core inflation with the prices of food and gasoline added in.
B)overall inflation in the economy.
C)used only by the media for discussing inflation.
D)All of these statements are true.

Answer 1

core inflation with the prices of food and gasoline added in.

Question 2

________ inflation is more stable than __________ inflation,because it excludes food and gasoline prices.

A)Core;headline
B)Headline;core
C)Core;nominal
D)Nominal;core

Answer 2

Core;headline

Question 3

________ inflation is more stable than __________ inflation,because it ____________.

A)Core;headline;excludes food and gasoline prices
B)Headline;core;excludes food and gasoline prices
C)Core;headline;does not exclude food and gasoline prices
D)Headline;core;does not exclude food and gasoline prices

Answer 3

Core;headline;excludes food and gasoline prices

Question 4

Which measure of inflation best reflects underlying trends in the economy?

A)Core inflation
B)Headline inflation
C)Overall inflation
D)Nominal inflation

Question 5

An overall fall in prices in the economy is called:

A)inflation.
B)deflation.
C)core inflation.
D)core deflation.

Question 6

Nominal output is the _________ of goods and services,and real output is the _______ of goods and services.

A)dollar value;actual amount
B)actual amount;dollar value
C)actual amount;dollar value with inflation
D)dollar value with inflation;dollar value

Question 7

To measure core inflation,the BLS removes goods that:

A)have historically volatile prices.
B)are considered necessities.
C)are luxury goods.
D)are durable and hold a constant value.

Question 8

Headline inflation:

A)includes all of the goods the average consumer buys.
B)is based on the CPI basket of goods.
C)is measured using core inflation with the prices of food and gasoline added in.
D)All of these statements are true.

Question 9

If the Fed doubled the money supply in one day,the amount of goods and services traded would:

A)not change.
B)increase.
C)decrease.
D)collapse.

Question 10

A measure of the average price level for GDP is called the:

A)aggregate price level.
B)national price level.
C)economy price level.
D)total price level.

Question 11

When the prices of food and gasoline are added to core inflation,we get:

A)core deflation.
B)headline inflation.
C)the CPI Index.
D)adjusted inflation.

Question 12

Deflation is:

A)an overall rise in prices in the economy.
B)an overall decline in prices in the economy.
C)an overall rise in prices in the economy,excluding those with historically volatile price changes.
D)an overall decline in prices in the economy,excluding those with historically volatile price changes.

Question 13

Core inflation is:

A)a measure of inflation using the CPI.
B)a measure of inflation that excludes goods with historically volatile price changes.
C)the BLS's official measure of changes in prices.
D)All of these statements are true.

Question 14

Which of the following goods' prices are not considered when calculating core inflation?

A)food
B)housing
C)clothing
D)All of these are necessities and are therefore not considered.

Question 15

An overall rise in prices in the economy is called:

A)inflation.
B)deflation.
C)core inflation.
D)core deflation.

Question 16

Inflation is:

A)an overall rise in prices in the economy.
B)an overall decline in prices in the economy.
C)an overall rise in prices in the economy,excluding those with historically volatile price changes.
D)an overall decline in prices in the economy,excluding those with historically volatile price changes.

Question 17

Which measure of inflation best reflects changing prices for the average consumer?

A)Headline inflation
B)Core inflation
C)Overall inflation
D)Nominal inflation

Question 18

The aggregate price level is:

A)a measure of the average price level for GDP.
B)measured by the CPI.
C)measured by the GDP price deflator.
D)All of these statements are true.

Question 19

To measure core inflation,the BLS excludes ______________ from the basket of goods used to calculate the CPI.

A)food and gasoline
B)food,clothing,and housing
C)food and housing
D)housing and gasoline

Question 20

Core inflation is a measure of:

A)inflation that excludes goods with historically volatile price changes.
B)an overall rise in prices in the economy.
C)the Consumer Price Index with durable goods excluded.
D)the change in the Consumer Price Index with durable goods excluded.

Question 21

The classical theory of inflation illustrates the relationship between:

A)money supply,output,and the overall level of prices.
B)spending,saving,and the overall price level.
C)savings,investment,and the interest rate.
D)None of these statements is true.

Question 22

According to the quantity theory of money,changes in the price level are primarily the result of changes in the:

A)quantity of money.
B)unemployment rate.
C)rate of spending.
D)total output.

Question 23

Price indexes:

A)allow us to convert nominal measures of output into real measures of output.
B)let us measure how much real stuff we get for our money.
C)like the CPI or GDP price deflator are used to measure the aggregate price level.
D)All of these statements are true.

Question 24

According to the quantity theory of money,an increase in the money supply leads to:

A)an increase in prices,as there are more dollar bills spent on the same number of goods and services.
B)an increase in prices,as there are the same dollar bills spent on a greater number of goods and services.
C)a decrease in prices,as there are more dollar bills spent on the same number of goods and services.
D)a decrease in price,as there are the same dollar bills spent on a greater number of goods and services.

Question 25

If an economy produces 2,000 units of output with a price level of $1 and the money supply (M)is $1,000,velocity is:

A)2.
B)500.
C)50.
D).5.

Question 26

The neutrality of money is the idea that:

A)aggregate price levels do not affect real outcomes in the economy.
B)hard money has a neutral effect in the economy.
C)in real terms,it makes no difference who is spending each dollar.
D)virtual money has a neutral effect in the economy.

Question 27

The relationship between money supply,output,and the overall level of prices is illustrated by:

A)the classical theory of inflation.
B)the neutrality of money.
C)the aggregate price level.
D)the measure of real output.

Question 28

In the long run,an increase in the aggregate price level:

A)doesn't change real output.
B)decreases real output.
C)increases real output.
D)increases spending.

Question 29

The quantity theory of money states explicitly that:

A)the overall quantity of money in existence is determined by the value of money.
B)the price level is determined by the money supply.
C)the money supply is determined by the price level.
D)None of these statements is true.

Question 30

If an economy produces 1,000 units of output with a price level of $1 and the money supply (M)is $500,velocity is:

A)2.
B)500.
C)50.
D).5.

Question 31

The velocity of money is:

A)the number of transactions a typical dollar is used in during a given period.
B)the number of goods a typical dollar can buy in a given period.
C)how quickly money is created through the financial system.
D)None of these statements is true.

Question 32

If an economy produces 2,000 units of output with a price level of $2 and the money supply (M)is $1,000,velocity is:

A)4.
B)500.
C)1.
D)2.

Question 33

The quantity theory of money relies on which variable to remain constant?

A)Velocity of money
B)Money supply
C)Price level
D)None of these is held constant.

Question 34

The number of transactions a typical dollar is used in during a given period is called the:

A)velocity of money.
B)transaction rate.
C)quantity theory of money.
D)transaction velocity.

Question 35

The velocity of money is:

A)how many times the average dollar gets spent per year.
B)the number of transactions in which a typical dollar is used during a year.
C)how many times on average the typical dollar changes hands in an exchange during the year.
D)All of these statements are true.

Question 36

The idea that aggregate price levels do not affect real outcomes in the economy is called:

A)the neutrality of money.
B)the aggregate price theory.
C)the neutrality of prices.
D)the real output theory.

Question 37

According to the quantity theory of money,if there are fewer dollars available to spend on the same number of goods and services,then:

A)the price level will fall.
B)the price level will rise.
C)output will decrease.
D)output will increase.

Question 38

According to the quantity theory of money,a decrease in prices would be due to:

A)a decrease in the money supply.
B)an increase in the money supply.
C)a decrease in the production of output.
D)an increase in the production of output.

Question 39

The notion that the value of money is determined by the overall quantity of money in existence is known as:

A)the quantity theory of money.
B)the money quantity theory.
C)the price level theory.
D)the level theory of prices.

Question 40

Price indexes allow us to convert __________ measures of output into _________ measures of output,because an increase in that would mean economic growth.

A)nominal;real
B)real;nominal
C)perceived;real
D)nominal;perceived

Question 41

The classical theory of inflation:

A)describes a long-run equilibrium.
B)explains the direct relationship between money supply and the price level.
C)shows neutrality of money in the long run.
D)All of these statements are true.

Question 42

Cost pull inflation occurs when:

A)the price of a key input increases suddenly.
B)the price level changes in response to changes in the business cycle.
C)the price of necessity goods increases suddenly.
D)the business cycle becomes sporadic and unpredictable.

Question 43

If an economy produces 3,000 units of output with a money supply of $500 and a velocity of 9,we know the price level must be:

A)$1.50.
B)$2.
C)$4.50.
D)$9.

Question 44

If an economy produces 4,000 units of output with a price level of $2 and with a velocity of money of 8,we know that the money supply must be:

A)$1,000.
B)$8,000.
C)$2,000.
D)$4,000.

Question 45

The quantity equation implies that any decrease in the money supply has to lead directly to:

A)an increase in P.
B)a decrease in P.
C)an increase in Y.
D)a decrease in Y.

Question 46

If an economy produces 1,000 units of output with a price level of $5 and the money supply (M)is $1,000,velocity is:

A)5.
B)200.
C)50.
D)2.

Question 47

More recently,the velocity of money was:

A)higher during the housing boom and lower during the recession that followed.
B)lower during the housing boom and higher during the recession that followed.
C)consistently higher than the historical trend since the mid 1980s.
D)consistently lower than the historical trend since the early 1990s.

Question 48

Historically,velocity has been:

A)relatively stable,though the recent crisis has temporarily caused some significant changes.
B)relatively stable,though the Great Depression of the 1930s caused some significant fluctuations.
C)in sync with the business cycle,slowing during times of decline and increasing with recovery.
D)in sync with the business cycle,increasing during times of decline and increasing with recovery.

Question 49

If an economy produces 3,000 units of output with a price level of $2 and with a velocity of money of 12,we know that the money supply must be:

A)$1000.
B)$500.
C)$2,000.
D)$4,000.

Question 50

If an economy produces 5,000 units of output with a price level of $1 and with a velocity of money of 4,we know that the money supply must be:

A)$4,000.
B)$1,250.
C)$2,500.
D)$5,000.

Question 51

The quantity equation states:

A)M × V = P × Y.
B)M × P = Y × V.
C)P × V = M × Y.
D)None of these statements is true.

Question 52

According to the quantity theory of money,the total money supply multiplied by the:

A)velocity of money is equal to the price level times real output.
B)price level is equal to the velocity of money times real output.
C)real output level is equal to the velocity of money times the price level.
D)None of these statements is true.

Question 53

If an economy has a money supply of $200,a velocity of 12,and a price level of $2,the output level must be:

A)1,200 units.
B)2,400 units.
C)600 units.
D)6,000 units.

Question 54

According to the quantity theory of money,increasing the money supply:

A)leads to inflation.
B)causes production to increase.
C)leads to increased spending.
D)causes each dollar to be spent less often.

Question 55

According to the quantity theory of money,if the economy were facing inflation,the Fed could combat it by:

A)decreasing the supply of money.
B)increasing the supply of money.
C)cutting taxes.
D)increasing taxes.

Question 56

If an economy produces 2,500 units of output with a money supply of $500 and a velocity of 10,we know the price level must be:

A)$1.
B)$5.
C)$2.
D)$10.

Question 57

If an economy produces 3,000 units of output with a price level of $2 and the money supply (M)is $2,000,velocity is:

A)2.
B)3.
C)67.
D)150.

Question 58

Temporary changes in the price level caused by changes in the business cycle are called:

A)demand pull inflation.
B)cost push inflation.
C)demand push inflation.
D)cost pull inflation.

Question 59

The constant velocity of money in the quantity equation implies that any increase in the money supply has to lead directly to:

A)an increase in P.
B)an increase in V.
C)an increase in Y.
D)a decrease in P.

Question 60

The money supply and velocity of money tell us:

A)the price value of real output.
B)the real output.
C)the nominal value with inflation accounted for.
D)None of these statements is true.

Question 61

If the average price level increases 10 percent per year,and the velocity of money is 2,then:

A)the inflation rate is 10 percent.
B)the inflation rate is 5 percent.
C)the inflation rate is 2 percent.
D)the velocity of money will increase.

Question 62

Menu costs refer to:

A)the money,time,and opportunity used to change prices to keep pace with inflation.
B)the time,money,and effort one has to spend managing cash in the face of inflation.
C)being penalized via taxes for making more money in dollars,even though real purchasing power hasn't changed at all.
D)None of these statements is true.

Question 63

Kim is paid $50,000 per year,and pays an annual income tax of 10 percent.Due to an inflation rate of 10 percent,her pay increases to $55,000,which puts her in a higher tax bracket where she must pay 20 percent.Which of the following can be said of Kim?

A)Inflation caused her to be taxed more heavily and decreased her purchasing power.
B)Inflation caused her to be taxed more heavily and increased her purchasing power.
C)Her raise reflects the inflation rate,and therefore her purchasing power is unchanged.
D)None of these statements is true.

Question 64

Kim is paid $50,000 per year,and pays an annual income tax of 10 percent.Due to an inflation rate of 10 percent,her pay increases to $55,000,which puts her in a higher tax bracket where she must pay 20 percent.Kim has experienced:

A)bracket creep.
B)the inflationary cost of tax distortion.
C)a decrease in her purchasing power.
D)All of these statements are true.

Question 65

Tax distortions refer to the cost of inflation that comes from:

A)the money,time,and opportunity used to change prices to keep pace with inflation.
B)the time,money,and effort one has to spend managing cash in the face of inflation.
C)being penalized via taxes for making more money in dollars,even though real purchasing power hasn't changed at all.
D)None of these statements is true.

Question 66

Tax distortions happen because tax laws take into consideration only:

A)nominal income.
B)real income.
C)nominal output.
D)real output.

Question 67

When the price of a key input increases suddenly,it causes:

A)cost push inflation.
B)the business cycle to become sporadic.
C)demand pull inflation.
D)the velocity of money to rise.

Question 68

The money,time,and opportunity used to change prices to keep pace with inflation are called:

A)menu costs.
B)shoe-leather costs.
C)tax distortions.
D)the velocity of inflation.

Question 69

One of the costs associated with predictable inflation is:

A)menu costs.
B)shoe-leather costs.
C)tax distortions.
D)All of these are costs of inflation.

Question 70

Inflation rates over the last 40 years have:

A)generally decreased around the world.
B)generally increased around the world.
C)generally increased for developing nations and decreased for developed nations.
D)generally decreased for developing nations and increased for developed nations.

Question 71

One of the costs associated with predictable inflation is:

A)tax distortions.
B)budget charges.
C)overheads.
D)None of these is a cost of inflation.

Question 72

Shoe-leather costs refer to:

A)the money,time,and opportunity used to change prices to keep pace with inflation.
B)the time,money,and effort one has to spend managing cash in the face of inflation.
C)being penalized via taxes for making more money in dollars,even though real purchasing power hasn't changed at all.
D)None of these statements is true.

Question 73

The time,money,and effort one has to spend managing cash in the face of inflation is referred to as:

A)shoe-leather costs.
B)menu costs.
C)tax distortions.
D)the velocity of inflation.

Question 74

While the __________ is immaterial,the _________ can have a big effect on economic behavior.

A)price level;unpredicted change in the price level
B)unpredicted change in the price level;price level
C)price level;predictable change in the price level
D)predictable change in the price level;price level

Question 75

Brian is paid monthly and typically takes $500 of his pay in cash to spend throughout the month,and the rest he leaves in an interest-bearing checking account.With the recent inflation,Brian finds it necessary to go to the bank every week,withdrawing $125 each time,so that his money can earn interest for as long as it can before Brian needs to withdraw it.The added hassle of going to the bank more often in response to inflation is called:

A)a shoe-leather cost.
B)a menu cost.
C)a transactions cost.
D)a tax distortion.

Question 76

Demand pull inflation occurs when:

A)the price of a key input increases suddenly.
B)the price level changes in response to changes in the business cycle.
C)the price of necessity goods increases suddenly.
D)the business cycle becomes sporadic and unpredictable.

Question 77

Arguably the most damaging economic consequence of inflation is:

A)high prices.
B)the uncertainty it can create.
C)the adjustment of sticky wages.
D)None of these statements is true.

Question 78

When L.L.Bean decides to increase its prices due to general inflation,they must reprint the millions of catalogs they produce and distribute.The costs associated with doing so in response to inflation are called:

A)menu costs.
B)shoe-leather costs.
C)tax distortions.
D)printing costs.

Question 79

The severe oil shortages of the 1970s created:

A)cost push inflation.
B)demand pull inflation.
C)a recession.
D)the velocity of money to rise.

Question 80

Being penalized via taxes for making more money in dollars even though your purchasing power hasn't changed at all is called:

A)tax distortion.
B)shoe-leather costs.
C)menu costs.
D)the velocity of inflation.