Question 1

The higher the rate of inflation, the lower the:
A)real interest rate can fall, as long as it is positive.
B)nominal interest rate can fall, as long as it is positive.
C)nominal interest rate can fall.
D)real interest rate can fall.

Accepted Answer

The real interest rate is adjusted for inflation, so as inflation increases, the real interest rate effectively decreases because the purchasing power of the interest earned is reduced. Nominal interest rates do not adjust for inflation directly.

Question 2

Given the basic rule of thumb for the relationship among inflation, productivity and nominal wage increases, if wages rise by 1 percent and productivity increases 2 percent, one would predict inflation to be:
A)−1 percent.
B)0 percent.
C)1.5 percent.
D)3 percent.

Accepted Answer

When productivity increases more than wages, it means goods and services can be produced more efficiently, leading to lower costs and potentially lower prices, which can result in negative inflation or deflation, hence −1 percent.

Question 3

The last time the United States experienced hyperinflation was during:
A)the oil crisis of the 1970s.
B)World War II.
C)the Civil War.
D)the Great Depression.

Accepted Answer

The United States experienced hyperinflation during the Civil War, particularly in the Confederate States, due to the massive printing of currency to finance the war effort, which led to a rapid decrease in the value of the Confederate dollar.

Question 4

In Zimbabwe, inflation rose from an annual rate of 32 percent in 1998 to 100,000 percent in early 2009. Considering only the effects of this unexpected inflation, which of the following groups are helped by the inflation:
A)Debtors
B)People living on fixed pensions
C)Unemployed people
D)No one; inflation hurts everyone

Accepted Answer

Debtors benefit from unexpected inflation because the real value of the money they owe is reduced, making it easier for them to pay back their debts with money that is worth less.

Question 5

A basic rule of thumb to predict inflation is that it equals:
A)real wage increases minus productivity growth.
B)productivity growth plus nominal wage increases.
C)productivity growth minus nominal wage increases.
D)nominal wage increases minus productivity growth.

Accepted Answer

Inflation can be roughly predicted by the difference between nominal wage increases and productivity growth. When nominal wages increase faster than productivity, it typically leads to inflation, as the cost of labor per unit of output increases, potentially leading to higher prices for goods and services.

Question 6

In a hyperinflation, the economy:
A)always collapses.
B)can continue to function but people are unwilling to hold any money.
C)can continue to function because people build expected inflation into wages and prices.
D)will slow on its own to lower inflation.

Accepted Answer

People build expected inflation into wages and prices, allowing the economy to continue functioning.

Question 7

In which case will adaptive, extrapolative and rational expectations predict the same inflation rate in the coming year?
A)Inflation is 4 percent last year, 2 percent this year, and the economist's model predicts 3 percent.
B)Inflation is 4 percent last year, 2 percent this year, and the economist's model predicts 0 percent.
C)Inflation is 3 percent last year, 2 percent this year, and the economist's model predicts 4.5 percent.
D)In none of the options would the predictions be the same.

Accepted Answer

Adaptive, extrapolative, and rational expectations rely on different methods for predicting future inflation, so they are unlikely to predict the same rate unless all conditions align perfectly, which is not the case in any of the given options.

Question 8

A situation in which the price level increases at an extremely high rate is called:
A)hyperinflation.
B)disinflation.
C)inflation.
D)stagflation.

Accepted Answer

Hyperinflation is characterized by an extremely high and typically accelerating rate of inflation, often resulting in the rapid erosion of the real value of local currency.

Question 9

Inflationary expectations are important, because widespread changes in inflationary expectations affect:
A)the distribution of income.
B)relative prices.
C)actual inflation.
D)Okun's rule of thumb.

Accepted Answer

Inflationary expectations can lead to actual inflation as businesses and consumers adjust their behavior based on what they expect prices to do in the future, potentially creating a self-fulfilling prophecy.

Question 10

In an unexpected inflation, lenders will generally:
A)gain relative to borrowers.
B)lose relative to borrowers.
C)neither gain nor lose relative to borrowers.
D)The effect will be totally random.

Accepted Answer

In an unexpected inflation scenario, the value of money decreases over time, meaning the amount repaid by borrowers will have less purchasing power than the amount originally lent. Therefore, lenders lose relative to borrowers, as they receive back less in real terms than they lent out.

Question 11

Governments usually accept goods inflation as long as it stays low, which for the United States currently means around:
A)1 to 2.5 percent.
B)3.5 to 4 percent.
C)5.5 to 6 percent.
D)7.5 to 8 percent.

Accepted Answer

The United States generally considers an inflation rate of 1 to 2.5 percent as acceptable and low, aiming to maintain economic stability without hindering growth.

Question 12

Given the basic rule of thumb for the relationship among inflation, productivity and nominal wage increases, if wages rise by 2 percent and productivity increases 1 percent, one would predict inflation to be:
A)0 percent.
B)1 percent.
C)1.5 percent.
D)3 percent.

Accepted Answer

The basic rule of thumb for the relationship among inflation, productivity, and nominal wage increases suggests that inflation equals wage increases minus productivity increases. Therefore, if wages rise by 2 percent and productivity increases by 1 percent, inflation would be predicted to be 1 percent (2% - 1% = 1%).

Question 13

One reason goods inflation is preferred by policymakers is that it:
A)keeps the economy away from asset inflation.
B)keeps the economy away from asset deflation.
C)makes people richer.
D)makes people see the importance of monetary policy.

Accepted Answer

The answer of One reason goods inflation is preferred by...

Question 14

A central policy concern about inflation is to see that it:
A)does not become built into expectations.
B)does not redistribute income.
C)does redistribute income.
D)does become built into expectations.

Accepted Answer

When inflation becomes built into expectations, it can lead to a self-perpetuating cycle of inflation, where businesses and individuals expect prices to continue rising and adjust their behavior accordingly, potentially worsening the inflation situation.

Question 15

If inflation increases unexpectedly, then:
A)borrowers tend to lose.
B)lenders tend to lose.
C)lenders and borrowers tend to gain.
D)neither borrowers nor lenders tend to lose.

Accepted Answer

When inflation increases unexpectedly, the value of money decreases, meaning the amount paid back by borrowers has less purchasing power than anticipated, causing lenders to lose.

Question 16

In Zimbabwe, inflation rose from an annual rate of 32 percent in 1998 to 100,000 percent in early 2009. Considering only the effects of this unexpected inflation, which of the following is most harmed by the inflation?
A)Businesses with large inventories
B)Businesses with large debts
C)Businesses with wages determined by long-term contracts
D)Businesses who had contracted to sell their services to others at fixed prices

Accepted Answer

Businesses that had contracted to sell their services at fixed prices would be most harmed because the value of the money they receive would be significantly eroded by inflation, reducing their real income and profitability.

Question 17

When inflation is unexpected, it tends to hurt:
A)people who save money in financial institutions.
B)people who borrow money from financial institutions.
C)businesses who borrow money from financial institutions.
D)people with flexible income.

Accepted Answer

Unexpected inflation erodes the purchasing power of money saved in financial institutions, hurting savers.

Question 18

According to the text, if individuals base their expectations on the past, we could say that their expectations are:
A)rational.
B)historical.
C)adaptive.
D)regressive.

Accepted Answer

Adaptive expectations are formed based on past events and information. This means individuals adjust their expectations for the future based on what has happened in the past.

Question 19

According to the text, if individuals base their expectations on economic models, we say that their expectations are:
A)rational.
B)historical.
C)adaptive.
D)extrapolative.

Accepted Answer

Rational expectations are those formed by using all available information, including data from economic models, to make forecasts. This concept assumes that individuals use all relevant data and economic theories to form expectations about future events.

Question 20

Given the basic rule of thumb for the relationship among inflation, productivity and nominal wage increases, if wages rise by 5 percent and productivity increases 3 percent, one would predict inflation to be:
A)−1 percent.
B)0 percent.
C)1 percent.
D)2 percent.

Accepted Answer

The basic rule of thumb for the relationship among inflation, productivity, and nominal wage increases suggests that if wages rise faster than productivity, the difference will likely be passed on as inflation. Here, with a 5 percent wage increase and a 3 percent productivity increase, the difference is 2 percent, suggesting an inflation prediction of 2 percent.

Quiz 34: Inflation, Deflation, and Macro Policy

The higher the rate of inflation, the lower the:

Given the basic rule of thumb for the relationship among inflation, productivity and nominal wage increases, if wages rise by 1 percent and productivity increases 2 percent, one would predict inflation to be:

The last time the United States experienced hyperinflation was during:

In Zimbabwe, inflation rose from an annual rate of 32 percent in 1998 to 100,000 percent in early 2009. Considering only the effects of this unexpected inflation, which of the following groups are helped by the inflation:

A basic rule of thumb to predict inflation is that it equals:

In a hyperinflation, the economy:

In which case will adaptive, extrapolative and rational expectations predict the same inflation rate in the coming year?

A situation in which the price level increases at an extremely high rate is called:

Inflationary expectations are important, because widespread changes in inflationary expectations affect:

In an unexpected inflation, lenders will generally:

Governments usually accept goods inflation as long as it stays low, which for the United States currently means around:

Given the basic rule of thumb for the relationship among inflation, productivity and nominal wage increases, if wages rise by 2 percent and productivity increases 1 percent, one would predict inflation to be:

One reason goods inflation is preferred by policymakers is that it:

A central policy concern about inflation is to see that it:

If inflation increases unexpectedly, then:

In Zimbabwe, inflation rose from an annual rate of 32 percent in 1998 to 100,000 percent in early 2009. Considering only the effects of this unexpected inflation, which of the following is most harmed by the inflation?

When inflation is unexpected, it tends to hurt:

According to the text, if individuals base their expectations on the past, we could say that their expectations are:

According to the text, if individuals base their expectations on economic models, we say that their expectations are:

Given the basic rule of thumb for the relationship among inflation, productivity and nominal wage increases, if wages rise by 5 percent and productivity increases 3 percent, one would predict inflation to be: