Question 1

Suppose you sell surfboards for a living, and you expect the price of surfboards to increase at the same rate as inflation; you adjust your prices accordingly. If this does not occur, then it must be true that:
A)the price of surfboards is changing at a rate that is different from what was expected.
B)the inflation rate is different from what was expected.
C)both the price of surfboards and the inflation rate are different from what was expected.
D)the relative price of surfboards is changing.

Accepted Answer

If the price of surfboards is adjusted according to the expected inflation rate, but the actual outcome does not align with this expectation, it indicates that the relative price of surfboards (their price in comparison to other goods and services) is changing. This could happen even if the inflation rate matches expectations, but other factors cause surfboard prices to diverge from the general inflation trend.

Question 2

Inflation frees policy makers from:
A)the 2.5 percent interest rate lower bound.
B)the 2.5 percent growth rate bound.
C)the zero interest rate lower bound.
D)the zero interest rate upper bound.

Accepted Answer

Inflation allows central banks to set nominal interest rates above zero even when real interest rates are negative, thus avoiding the zero interest rate lower bound (ZIRB) which can limit monetary policy effectiveness.

Question 3

Asset deflation generally:
A)is more harmful than the preceding inflation was helpful.
B)is less harmful than the preceding inflation was helpful.
C)is neither good nor bad, it merely redistributes income.
D)cannot occur because people will know it will follow asset inflation.

Accepted Answer

Asset deflation is often considered more harmful than the preceding inflation was helpful because it can lead to a downward spiral in the economy, reducing consumer spending, leading to lower production, higher unemployment, and financial instability.

Question 4

Before the financial crisis of 2008:
A)the 2.5 percent inflation target was seen as a lower bound.
B)the 2.5 percent inflation target was seen as an upper bound.
C)the 2.5 percent inflation target was seen as a precise target.
D)inflation was not seen as a target.

Accepted Answer

Before the financial crisis of 2008, central banks, including the Federal Reserve, typically aimed to keep inflation rates low to ensure economic stability. The 2.5 percent inflation target was generally viewed as an upper bound, meaning that central banks aimed to keep inflation at or below this level to prevent the economy from overheating and to maintain the purchasing power of the currency.

Question 5

Policy makers:
A)like inflation because it allows individuals to maintain illusions.
B)dislike inflation because it allows individuals to maintain illusions.
C)like inflation because it makes society richer.
D)dislike inflation because it redistributes income.

Accepted Answer

The answer of Policy makers:
A)like inflation because it allows individuals...

Question 6

Inflation:
A)has only costs.
B)has both benefits and costs.
C)just exists; it does not have benefits or costs.
D)has costs and benefits that generally offset each other.

Accepted Answer

Inflation can have both benefits and costs. For example, moderate inflation can encourage consumption and investment, as people anticipate higher prices in the future. However, high inflation can erode purchasing power and create uncertainty in the economy, leading to negative impacts such as reduced savings and investment. Therefore, inflation is not purely detrimental or beneficial; its effects depend on its rate and the economic context.

Question 7

Over the last 20 years, the United States experienced periods of considerable:
A)asset price inflation, followed by sudden spurts of asset price deflation.
B)goods price inflation, followed by sudden spurts of goods price deflation.
C)asset price deflation, followed by sudden spurts of goods price inflation.
D)asset price deflation, followed by sudden spurts of asset price inflation.

Accepted Answer

The United States has seen significant asset price inflation over the last 20 years, particularly in the housing and stock markets, followed by sharp corrections or deflations, such as the 2008 financial crisis and subsequent housing market crash. This pattern does not as prominently apply to goods price inflation and deflation.

Question 8

With 6 percent inflation and a 1 percent nominal interest rate, the real interest rate is:
A)7 percent.
B)1 percent.
C)−5 percent.
D)5 percent.

Accepted Answer

The real interest rate can be calculated using the formula: real interest rate = nominal interest rate - inflation rate. Therefore, 1% - 6% = -5%.

Question 9

If inflation is highly volatile:
A)mortgage contracts will likely be more complicated.
B)mortgage contracts will likely be less complicated.
C)there will be no mortgage contracts.
D)there will be no effect on mortgage contracts.

Accepted Answer

Highly volatile inflation makes predicting future economic conditions more challenging, leading to more complex mortgage contracts to account for this uncertainty.

Question 10

Inflation:
A)can obscure relative price changes.
B)redistributes income from those who can raise prices to those who cannot.
C)can undermine faith in the monetary system, the economy, and the government if it is high enough.
D)makes society poorer on average.

Accepted Answer

The answer of Inflation:
A)can obscure relative price changes.
B)redistributes income from...

Question 11

If monetary policy makers want to target a negative interest rate, they:
A)cannot do so since negative interest rates are impossible.
B)need to stop inflation before they do it.
C)need to encourage inflation before they do it.
D)need to stop asset inflation before they do it.

Accepted Answer

Negative interest rates are used as a policy tool to combat deflationary pressures, not inflation. By encouraging inflation, they aim to stimulate spending and investment in an economy where traditional monetary policy tools have become ineffective.

Question 12

If inflation is highly volatile, money is:
A)more valuable because you need more of it.
B)less valuable because there is less of it.
C)more valuable because its unit of account function is reduced.
D)less valuable because its unit of account function is reduced.

Accepted Answer

Inflation, especially when highly volatile, undermines the stability of a currency's value, making it less reliable as a unit of account. This reduction in the unit of account function decreases the overall value of money, as it becomes harder to measure and compare the value of goods and services over time.

Question 13

The effects of asset price inflation and asset price deflation generally:
A)even out.
B)have unequal effects on the economy.
C)are unrelated.
D)are addressed by policymakers.

Accepted Answer

Asset price inflation and asset price deflation have unequal effects on the economy. Asset price inflation can lead to increased wealth and spending for asset holders, potentially overheating the economy. Asset price deflation, on the other hand, can lead to decreased wealth, reduced spending, and can contribute to economic downturns or recessions. The asymmetry in their impacts makes their effects unequal.

Question 14

If there is inflation the:
A)unit of account function of money is improved.
B)unit of account function of money is undermined.
C)distributional function of money is improved.
D)distributional function of money is undermined.

Accepted Answer

Inflation undermines the unit of account function of money because it erodes the value of money, making it less reliable as a measure of value.

Question 15

If asset prices rise:
A)real wealth increases.
B)productive capacity increases.
C)inflation increases.
D)it is unclear whether wealth increases or inflation has occurred.

Accepted Answer

When asset prices rise, it is not immediately clear if this is due to an increase in real wealth or if it is a result of inflation, as both can cause asset prices to increase.

Question 16

Generally, in the United States today, goods inflation:
A)under 5 percent is considered acceptable.
B)under 2.5 percent is considered acceptable.
C)at zero is considered acceptable.
D)that is negative is preferable.

Accepted Answer

In the United States, the Federal Reserve generally aims for a 2% inflation rate as part of its dual mandate to promote maximum employment and stable prices. Therefore, goods inflation under 2.5% is typically considered acceptable.

Question 17

Inflation is undesirable because it:
A)always makes the nation poorer.
B)redistributes income from those who can raise prices to those who cannot.
C)distorts the information value of prices.
D)makes everyone worse off.

Accepted Answer

The answer of Inflation is undesirable because it:
A)always makes the...

Question 18

Currently, if inflation is 2 percent and the goods inflation target is 2.5 percent, policymakers:
A)congratulate themselves for coming in under their target.
B)are unhappy because they have come in under their target.
C)are indifferent because they don't have an inflation target.
D)are indifferent because they are more interested in asset inflation.

Accepted Answer

Policymakers would be unhappy because they have come in under their target. If the goods inflation target is 2.5 percent, achieving only 2 percent inflation means they have not reached their goal, indicating that the economy might not be growing as desired or that monetary policy might need adjustment to stimulate higher inflation towards the target.

Question 19

A cost of inflation is that it:
A)makes everyone poorer.
B)makes the poor poorer and the rich richer.
C)reduces the informational content of prices.
D)it raises real interest rates.

Accepted Answer

Inflation can distort the information conveyed by prices because it affects the purchasing power of money. When prices rise due to inflation, it becomes harder to discern whether the price increase is due to actual changes in supply and demand or merely the inflationary effect, thus reducing the informational content of prices.

Question 20

Because inflation undermines money's unit of account function, government policy will try to keep it:
A)at zero.
B)at a low rate.
C)negative.
D)at either a low or a negative rate.

Accepted Answer

Inflation undermines money's unit of account function by eroding the value of money over time, making it difficult to compare values accurately. Governments aim to keep inflation at a low rate to maintain economic stability and preserve the purchasing power of the currency, rather than aiming for zero or negative inflation, which can have other negative economic consequences.

Quiz 34: Inflation, Deflation, and Macro Policy

Suppose you sell surfboards for a living, and you expect the price of surfboards to increase at the same rate as inflation; you adjust your prices accordingly. If this does not occur, then it must be true that:

Inflation frees policy makers from:

Asset deflation generally:

Before the financial crisis of 2008:

Policy makers:

Inflation:

Over the last 20 years, the United States experienced periods of considerable:

With 6 percent inflation and a 1 percent nominal interest rate, the real interest rate is:

If inflation is highly volatile:

Inflation:

If monetary policy makers want to target a negative interest rate, they:

If inflation is highly volatile, money is:

The effects of asset price inflation and asset price deflation generally:

If there is inflation the:

If asset prices rise:

Generally, in the United States today, goods inflation:

Inflation is undesirable because it:

Currently, if inflation is 2 percent and the goods inflation target is 2.5 percent, policymakers:

A cost of inflation is that it:

Because inflation undermines money's unit of account function, government policy will try to keep it: