Question 1

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

Accepted Answer

The United States experienced hyperinflation during the Civil War, particularly in the Confederate states, due to excessive printing of money to finance the war.

Question 2

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 3

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

If individuals base their expectations on the past, their expectations are considered adaptive because they are adjusting their expectations based on previous experiences. This can be a rational approach to decision-making, but the term "rational" alone does not accurately describe this specific behavior. "Historical" suggests a focus on the past without necessarily considering its relevance to the present or future, and "regressive" implies a return to an earlier, less advanced stage, which is not necessarily the case when individuals use past experiences to inform their expectations.

Question 4

According to the quantity theory:
A)unemployment is everywhere and always a monetary phenomenon.
B)inflation is everywhere and always a monetary phenomenon.
C)real output is everywhere and always a monetary phenomenon.
D)the equation of exchange does not hold true.

Accepted Answer

The quantity theory of money suggests that inflation is primarily caused by changes in the money supply. It posits that an increase in money supply leads to a proportional increase in the price level, assuming velocity and output are constant.

Question 5

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 6

Governments usually accept goods inflation as long as it stays low, which for the United States currently means around:
A)1 to 1.5 percent
B)2.5 to 3 percent.
C)3.5 to 4 percent.
D)5.5 to 6 percent.

Accepted Answer

The Federal Reserve targets an inflation rate of 2%.

Question 7

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 8

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.

Question 9

If inflation is 3 percent last year and 2 percent this year an individual who follows extrapolative expectations, what is the inflation rate that the individual is likely to for the coming year?
A)0 percent
B)1 percent
C)3 percent.
D)5 percent.

Accepted Answer

Extrapolative expectations involve predicting future values based on past trends. Since inflation decreased from 3% to 2%, the individual might expect a further decrease, possibly predicting 1% for the coming year.

Question 10

If productivity growth is 2 percent and inflation is 5 percent, on average nominal wage increases will be:
A)2 percent.
B)3 percent.
C)5 percent.
D)7 percent.

Accepted Answer

Nominal wage increases typically reflect the sum of productivity growth and inflation, so in this case, 2 percent (productivity growth) + 5 percent (inflation) = 7 percent.

Question 11

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

Widespread changes in inflationary expectations can lead to changes in the way people spend and invest their money, which can impact the overall level of inflation in the economy. As a result, actual inflation can be affected by changes in inflationary expectations.

Question 12

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

If individuals base their expectations on economic models, we say their expectations are rational. This means they are using all available information and incorporating it into their decision-making process.

Question 13

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 14

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

The answer of In a hyperinflation, the economy:
A)always collapses.
B)can continue...

Question 15

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 a situation in which the price level increases at an extremely high rate, typically exceeding 50% per month. It is characterized by a rapid decrease in the purchasing power of money, leading to a breakdown in the economy and social unrest. Disinflation refers to a slowdown in the rate of inflation, while inflation refers to a general increase in the price level. Stagflation refers to a combination of high inflation and low economic growth.

Question 16

A basic rule of thumb to predict inflation is inflation 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 approximated by the difference between nominal wage increases and productivity growth. If wages rise faster than productivity, it can lead to inflation.

Question 17

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 states that if nominal wage increases by x percent and productivity increases by y percent, then inflation will be roughly x-y percent. Therefore, in this scenario, inflation would be approximately 2 percent - 1 percent = 1 percent.

Question 18

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 19

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 expectations rely solely on past experiences to predict future inflation rates, while extrapolative expectations use past trends to extrapolate future inflation rates. Rational expectations take into account all available information, including past trends, current market conditions, and expected policy changes, to form expectations about future inflation rates.

Therefore, in option A, adaptive expectations would predict a higher inflation rate (closer to the 4 percent of the previous year) than extrapolative or rational expectations, as the recent decrease in inflation would not have as much impact on their predictions. In option B, all three types of expectations would predict a lower inflation rate, as the recent decrease in inflation would lead them to forecast lower inflation in the future as well.

In option C, adaptive and extrapolative expectations would predict lower inflation rates than rational expectations, as the recent decrease in inflation would lead them to underestimate the impact of a potential future increase. Rational expectations would take all available information into account and predict a higher inflation rate, incorporating the possibility of future policy changes or market shifts that could result in higher inflation.

Therefore, in none of the options would adaptive, extrapolative, and rational expectations predict the same inflation rate in the coming year.

Question 20

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

If inflation becomes built into expectations, it can become a self-fulfilling prophecy, leading to a cycle of rising prices and decreasing purchasing power. This can be detrimental to the economy and society as a whole. Therefore, it is important to prevent this from happening.

Quiz 34: Inflation, Deflation, and Macro Policy

The last time the United States experienced hyperinflation was:

The higher the rate of inflation, the lower the:

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

According to the quantity theory:

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:

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

In an unexpected inflation, lenders will generally:

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:

If inflation is 3 percent last year and 2 percent this year an individual who follows extrapolative expectations, what is the inflation rate that the individual is likely to for the coming year?

If productivity growth is 2 percent and inflation is 5 percent, on average nominal wage increases will be:

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

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

If inflation increases unexpectedly, then:

In a hyperinflation, the economy:

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

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

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

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

A central policy concern about inflation is to see that it