Question 1

Wages are often tied to expected rates of inflation; thus one reason why inflation is important is that:

Accepted Answer

Inflation creates uncertainty about costs and prices, which affects both employees and employers. This uncertainty can lead to difficulties in financial planning and can result in lower real wages for employees and lower profits for employers. Thus, inflation is an important consideration for both employees and employers when it comes to wage negotiations and financial planning.

Question 2

Your nominal wage increases by 10%,and the overall price level increases by 12%.Which statement is correct?

Accepted Answer

When your nominal wage increases by 10% but the overall price level increases by 12%, your real wage actually decreases. If you feel richer despite this, you are experiencing money illusion, which is when people mistake nominal changes for real changes.

Question 3

If nominal income increases,then:

Accepted Answer

Nominal income refers to the amount of money earned without adjusting for inflation, while real income takes into account the impact of inflation on purchasing power. If the price index falls, indicating a decrease in the general level of prices, then an increase in nominal income will lead to an increase in real income because the same amount of money can now buy more goods and services. Option A is not necessarily true because real income depends on the rate of inflation, which is not mentioned in the question. Option C does not make sense because the percent increase in the price index cannot rise more than the nominal income, as it is the basis for calculating the price index. Option D is also not applicable because the consumer price index includes a range of goods and services, and their prices may not all decrease at the same rate. Option E is incorrect because an increase in nominal income means that people have more money to spend, which typically leads to an increase in purchasing power, barring extreme inflation or other factors that may affect the stability of the economy.

Question 4

You have to pay costs for your business now but you also have to enter into long-term contracts to repay loans in the future.If inflation occurs,the best term for the problem that occurs in this case is:

Accepted Answer

Future price uncertainty refers to the uncertainty of the future value of money, which is relevant when entering into a long-term contract. Inflation can cause future prices to be higher than expected, which can lead to difficulties in meeting the repayment obligations of loans taken out in the present. Menu costs refer to the costs associated with adjusting prices, price confusion is not a recognized economic term, deflationary price pressures refer specifically to prices falling rather than rising, and present value/future value uncertainty generally refers to uncertainty around investment returns rather than loan repayments.

Question 5

Inflation can create uncertainty by making:

Accepted Answer

The answer of Inflation can create uncertainty by making:
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Question 6

The signing of long-term wage and price agreements and the relationship to inflation most likely raises the issue of:

Accepted Answer

Long-term wage and price agreements may create future price uncertainty, as inflation and other economic factors can vary over time. The agreements may have been signed based on current conditions, but those conditions may change in the future, leading to unforeseen consequences.

Question 7

If Robert was earning $10,000 and now earns $11,500,then:

Accepted Answer

If prices increase by 15% or more, Robert's purchasing power may not have increased despite the nominal wage increase, leading to money illusion.

Question 8

If real income increases,then:

Accepted Answer

Nominal income rises faster than prices.

Question 9

You get a pay raise and feel richer even though your raise did not keep up with inflation; this is best described as:

Accepted Answer

This situation is best described as money illusion, where an individual feels richer because of an increase in nominal income without considering the impact of inflation.

Question 10

You are offered two jobs,one in Richmond,Virginia,paying $67,000,and one in San Diego,California,paying $79,000.The price index in Richmond is 104.5,and in San Diego it is 132.3.If real wages are the only consideration,then:

Accepted Answer

The answer of You are offered two jobs,one in Richmond,Virginia,paying...

Question 11

Deflation is occurring in a nation; the implication(s) of this is/are:

Accepted Answer

Deflation is a general decline in prices, meaning that the cost of living decreases, which can result in an increase in the purchasing power of money. Therefore, holding nominal wages constant, the real wage would rise, as workers can buy more goods and services with the same amount of money.

Question 12

Typically if real wages fall,the quantity demanded of labor rises.If workers agree to 3% wage increases for a four-year period and inflation is more than 3%,then,based on this information alone:

Accepted Answer

If inflation is more than 3%, the real wages of workers will fall despite the nominal wage increase, leading to an increase in the quantity demanded of labor.

Question 13

Inflation is not a problem:

Accepted Answer

Inflation creates uncertainty over future prices, which can lead to negative economic effects such as reduced investment and savings.

Question 14

Menu costs of inflation:

Accepted Answer

Menu costs refer to the costs incurred by businesses when they have to change their prices due to inflation. This can involve the printing of new menus or updating pricing systems, both of which incur costs for the business.

Question 15

Inflation creates uncertainty because:

Accepted Answer

Inflation creates uncertainty because it creates unknown values for real interest rates, prices, and wages. Nominal values can be easily adjusted for inflation, but real values are more difficult to determine because the inflation rate is not fixed and can fluctuate rapidly. This uncertainty makes it difficult for individuals and businesses to plan for the future and can lead to economic instability.

Question 16

Deflation:

Accepted Answer

Deflation means a decline in the general price level of goods and services. If nominal wages remain the same but prices fall, then real wages (purchasing power of money) increase, and people can buy more goods and services. However, if nominal wages fall at a slower rate than prices, then real wages decrease, and people can afford fewer goods and services, leading to a decline in their standard of living. Thus, choice C is correct.

Question 17

As a business owner,you find that your resource prices are increasing often.Because these costs are rising,you find it necessary to change your prices frequently.This best describes:

Accepted Answer

Menu costs refer to the costs incurred by a business when they change their prices, such as the cost of printing new menus, recalculating pricing strategies, or updating digital platforms. When resource prices are increasing often, a business owner may find it necessary to change their prices frequently to account for these rising costs, leading to higher menu costs.

Question 18

You are offered two jobs,one in Chicago paying $67,000 and one in Dallas paying $58,000.The price index in Chicago is 110.8,and in Dallas it is 91.5.If real wages are the only consideration,then:

Accepted Answer

To compare real wages, adjust the salaries by the price index: Chicago's real wage = $67,000 / 110.8 = $604.69, and Dallas's real wage = $58,000 / 91.5 = $634.97. The real wage is higher in Dallas.

Question 19

Milton Friedman,who won the Nobel Prize in Economics,characterized inflation as being "high and variable." These characteristics of inflation create problems because:

Accepted Answer

Inflation that is high and variable creates future price uncertainty, which can make it difficult for individuals and businesses to plan for and make decisions based on future prices. This can lead to economic inefficiencies and distortions.

Question 20

You are offered two jobs,one in Chicago paying $67,000 and one in Philadelphia paying $79,000.The price index in Chicago is 110.8,and in Philadelphia it is 126.5.If real wages are the only consideration,then:

Accepted Answer

The answer of You are offered two jobs,one in Chicago...

Quiz 8: The Price Level and Inflation