Question 1

If global prices are lower than domestic prices, the short-run Phillips curve is likely to be horizontal.

Accepted Answer

If global prices are lower than domestic prices, domestic producers will be unable to raise prices without losing market share to foreign competitors. This will keep the short-run Phillips curve horizontal.

Question 2

Asset price inflation occurs when the prices of assets rise.

Accepted Answer

False

Question 3

Asset price inflation can be a problem because it:

Accepted Answer

Asset price inflation can create a misleading perception of increased real wealth, as the nominal value of assets rises without a corresponding increase in real purchasing power. This can lead to overconfidence in financial health and potentially risky investment behaviors based on inflated asset values.

Question 4

According to the Phillips curve model, when expectations of inflation increase, the same level of unemployment will be associated with a higher rate of inflation.

Accepted Answer

The Phillips curve model suggests that there is an inverse relationship between unemployment and inflation. When expectations of inflation increase, workers demand higher wages to compensate for expected increases in the price level, and firms pass these higher costs on to consumers in the form of higher prices, leading to a higher rate of inflation at the same level of unemployment.

Question 5

Expectations of inflation are assumed to be constant at each point on a given short-run Phillips curve.

Accepted Answer

The short-run Phillips curve assumes a stable relationship between inflation and unemployment, implying that inflation expectations are constant along the curve.

Question 6

Asset inflation tends to hurt those who save in risky assets.

Accepted Answer

Asset inflation generally benefits those who hold or invest in risky assets, such as stocks or real estate, because the value of these assets tends to increase. Those who save in cash or cash equivalents are more likely to be hurt by asset inflation, as the purchasing power of their savings diminishes.

Question 7

Asset inflation is when:

Accepted Answer

Asset inflation occurs when asset prices increase at a rate that exceeds their intrinsic or real value, often due to speculative demand or excessive liquidity in the market.

Question 8

If expectations of inflation are greater than actual inflation, the short-run Phillips curve will eventually shift upward.

Accepted Answer

If expectations of inflation are greater than actual inflation, it typically leads to adjustments in wage and price settings that can shift the short-run Phillips curve downward, as people adjust their expectations downwards. The Phillips curve illustrates the inverse relationship between the rate of inflation and the rate of unemployment.

Question 9

Economists before the 1940s were most likely to call a rise in asset prices inflation, as long as it is accompanied by an increase in:

Accepted Answer

Economists before the 1940s typically associated inflation with an increase in the money supply, which could lead to a rise in asset prices as more money chased the same amount of goods or assets, causing their prices to increase.

Question 10

Asset inflation:

Accepted Answer

Asset inflation refers to the situation where the prices of assets (such as real estate, stocks, or bonds) increase at a rate that outpaces the actual increase in their intrinsic or real value. This can happen due to various factors, including speculative demand or monetary policy effects, rather than improvements in the fundamental value of the assets.

Question 11

It's difficult to measure asset inflation because asset prices can increase when assets become more productive.

Accepted Answer

Asset inflation is challenging to measure accurately because an increase in asset prices can be due to genuine improvements in productivity or quality, making it hard to distinguish from inflation caused by other factors like excess demand or monetary policy.

Question 12

The long-run Phillips curve shifts to the left or the right as expectations of inflation change.

Accepted Answer

The long-run Phillips curve is vertical, indicating no trade-off between inflation and unemployment in the long run, and it does not shift with changes in inflation expectations.

Question 13

The prices of assets are included in standard measures of inflation.

Accepted Answer

The answer of The prices of assets are included in...

Question 14

The usefulness of standard goods market price indexes for judging policy is limited because:

Accepted Answer

Standard goods market price indexes, such as the Consumer Price Index (CPI), primarily focus on the prices of goods and services consumed by households and do not include the price of assets like stocks, bonds, or real estate. This limitation can make them less useful for policy decisions that affect or are affected by asset prices.

Question 15

Economists who accept the quantity theory of money favor a monetary rule because they believe the short-run effects of monetary policy are unpredictable and the long-run effects are on the price level, not real output.

Accepted Answer

Economists who accept the quantity theory of money indeed favor a monetary rule, as they argue that while the short-run effects of monetary policy can be unpredictable and potentially destabilizing, its long-run effects predominantly influence the price level rather than real output. This perspective leads them to advocate for a predictable, rule-based approach to monetary policy to ensure long-term price stability.

Question 16

Inflation redistributes income from people who do not raise their prices to people who do raise their prices.

Accepted Answer

Inflation tends to benefit those who can increase the prices of the goods or services they sell (such as businesses) at a rate higher than inflation, while it disadvantages those whose income does not increase at the same pace, such as fixed-income earners or workers with stagnant wages, effectively redistributing income from the latter to the former.

Question 17

Inflation has both benefits and costs.

Accepted Answer

Inflation can stimulate spending and investment due to the expectation that prices will continue to rise, potentially leading to economic growth. However, it can also erode purchasing power, create uncertainty in the economy, and negatively impact savers and those on fixed incomes.

Question 18

One way to measure asset inflation is to:

Accepted Answer

Asset inflation refers to the increase in the prices of assets relative to goods and services. Dividing nominal net worth by GDP and observing an increase suggests that asset prices are rising faster than the general price level of goods and services, indicating asset inflation.

Question 19

Asset inflation has a danger of:

Accepted Answer

Asset inflation can lead to a misallocation of resources to risky investments as investors chase higher returns, potentially creating bubbles and financial instability.

Question 20

Economists who accept the quantity theory of money believe that inflation is always and everywhere a monetary phenomenon.

Accepted Answer

Economists who accept the quantity theory of money argue that inflation occurs when the amount of money in an economy grows faster than its output, making it a monetary phenomenon.

Quiz 34: Inflation, Deflation, and Macro Policy