Question 1

Define inflation.Be specific.Be sure to address whether the prices of all goods are increasing,what is included in determining the basis for changes in the price level,and how the price level is measured.

Accepted Answer

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Question 2

A price confusion problem is best described as:
A) the difficulty producers have in determining whether higher prices are due to increased demand or inflation.
B) the difficulty consumers have in determining whether real prices have risen in order to decide whether they should buy more or less.
C) the difficulty that producers have in determining whether a wage increase will lead to an increase in real costs.
D) the problem consumers have in determining whether relative prices have changed when all prices are increasing, albeit at different rates.
E) the problem both consumers and producers face in interpreting consumer price index (CPI) data from the Bureau of Labor Statistics (BLS).

Accepted Answer

Price confusion occurs when producers cannot easily determine if price increases are due to genuine demand increases or inflation, affecting their production and pricing decisions.

Question 3

Arguably there are three reasons why the consumer price index (CPI) overstates inflation.List the reasons and explain each one.

Accepted Answer

The answer of Arguably there are three reasons why the...

Question 4

Using the table below,compute the consumer price index (CPI) in 2007 using 2006 as the base year.Show all your work.

Accepted Answer

The answer of Using the table below,compute the consumer price...

Question 5

The housing crisis has some roots in inflation because:
A) new houses were new goods and services and the consumer price index (CPI) didn't measure them.
B) builders confused inflation with an increase in demand and hence overbuilt-a price confusion problem.
C) there were menu costs associated with higher housing prices.
D) money illusion occurred when builders thought that real prices were rising.
E) money illusion occurred when housing buyers thought real wages were rising.

Accepted Answer

Builders confused the inflation with an increase in demand and hence overbuilt, which led to an excess supply of houses and eventually a housing crisis.

Question 6

According to the price confusion problem,if the price of a product increases,then:
A) the market demand has increased, and the firm's output should increase.
B) the market demand has increased, and the firm's output should decrease.
C) the price increase is due to inflation, and the firm's output should increase.
D) the price increase is due to inflation, and the firm's output should decrease.
E) prices as a whole fall, and the firm's output should increase.

Accepted Answer

The answer of According to the price confusion problem,if the...

Question 7

The website that provides official inflation statistics is:
A) www.econstats.com.
B) www.bls.gov.
C) www.bea.gov.
D) www.inflation.gov.
E) www.econometrics.com.

Accepted Answer

The Bureau of Labor Statistics (BLS) is responsible for collecting and reporting official inflation statistics in the United States, and its website is www.bls.gov. Options A, C, D, and E either do not exist or do not provide official inflation statistics.

Question 8

The distinction between price confusion problems and menu costs is that:
A) price confusion results from confusion between relative demand and inflationary pressures, whereas menu costs have to do with people confusing changes in nominal and real wages.
B) menu costs result from confusion between relative demand and inflationary pressures, whereas price confusion has to do with people confusing changes in nominal and real wages.
C) price confusion results from confusion between relative demand and inflationary pressures, whereas menu costs relate to producers changing prices, typically during inflationary periods.
D) menu costs occur during deflation, whereas price confusion problems occur during inflation.
E) menu costs only affect the food industry, whereas price confusion problems occur in high-tech industries.

Accepted Answer

Price confusion problems result from confusion between relative demand and inflationary pressures in the market. Menu costs, on the other hand, relate to the costs that producers incur when changing prices, typically during inflationary periods. Menu costs include the cost of reprinting menus, changing price tags, updating website prices, etc. So, option C correctly distinguishes between price confusion and menu costs.

Question 9

Describe menu costs.

Accepted Answer

The answer of Describe menu costs....

Question 10

Why would knowing the cost of living index be important in real life?
(Hint: Consider the following scenario.You get two job offers: one in San Francisco paying $80,000 per year and the other in Dallas paying $68,000 per year.)

Accepted Answer

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Question 11

Which of the following reflects a practical example of the price confusion problem?
A) Lines are short at the coffee shop you own because your resource prices are rising and your retail prices must be raised at the same rate; your customers are confused as to whether they should buy from your shop or not.
B) Long lines at the coffee shop you own prompt you to open a new coffee shop, but the second shop is unsuccessful because the first shop's success was just due to your prices being set too low (below market prices) because of inflation.
C) It is difficult for you to determine whether the long lines at your coffee shop are due to increased demand or because inflation has created "too many dollars chasing too few goods."
D) It is difficult for you to determine the right signal to send to your consumers through prices because the signal sent to you by the Bureau of Labor Statistics is easily misinterpreted.
E) Signals sent from consumers to producers are clear, but those from producers to consumers are confused.

Accepted Answer

Price confusion occurs when it is unclear whether price changes are due to changes in demand or inflation, making it difficult for businesses to make informed decisions.

Question 12

Your firm expands its output in a time when demand appears to be increasing.Demand for all goods is increasing because of inflation,and consumers want to buy all goods faster because their real purchasing power is falling due to inflation.This situation could indicate that:
A) your firm experienced future price uncertainty.
B) your firm experienced menu costs.
C) your firm experienced money illusion.
D) your firm experienced deflation.
E) your firm experienced a price confusion problem.

Accepted Answer

The situation describes a price confusion problem, where firms cannot distinguish whether the increase in demand is due to genuine consumer interest or inflation, leading to potential misinterpretation of market signals.

Question 13

In some nations the only currency is gold.Someone proposes the argument that if gold were the only currency,there could not be inflation.Would you agree or disagree with this statement? Explain

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Question 14

In the 1970s,the government attempted to regulate prices to control inflation; this attempt was unsuccessful.The most likely reason was that:
A) it increased menu costs.
B) it created future price certainty.
C) it removed relative price signals for those items that had actual increases in demand that were not due to inflation.
D) it created money illusion.
E) the Watergate break-in destroyed Americans' faith in the government.

Accepted Answer

When the government attempted to regulate prices, it removed relative price signals. This means that items that had actual increases in demand were not allowed to increase in price, which led to shortages and inefficiencies in the market. This is why price regulation was unsuccessful in controlling inflation.

Question 15

What is the underlying concept behind future price level uncertainty?

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Question 16

It has been shown that increases in the money supply are directly related to the rate of inflation.If the previous statement is true,then:
A) nations that increase their money supply most rapidly will be the most prosperous.
B) hyperinflation will normally be associated with large increases in the money supply.
C) hyperinflation will normally be associated with large decreases in the money supply.
D) menu costs will rise when the money supply falls.
E) real wages rise whenever the money supply increases.

Accepted Answer

The statement implies that increases in the money supply lead to inflation. In cases of excessive increases in the money supply, hyperinflation can occur. Therefore, hyperinflation is more likely to be associated with large increases in the money supply, as stated in option B. Option A is incorrect because rapid increases in the money supply can lead to inflation and currency devaluation, which can ultimately harm the economy. Option C is incorrect because large decreases in the money supply can lead to deflation and economic recession. Option D is unrelated to the statement, and option E is not necessarily true as the relationship between the money supply and real wages is more complex.

Question 17

Explain the notion of money illusion in specific detail.

Accepted Answer

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Question 18

Describe the methodology of finding the consumer price index (CPI).

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Question 19

You own a store and have not raised prices recently-and now your store has more customers.Which statement is correct?
A) This can be troublesome because you face a "menu costs" problem because you must not have increased prices fast enough.
B) This can be troublesome because you face a price confusion problem: You don't know if the extra business means that you should open another store, or if the crowds are a result of inflation, which has caused all consumers to buy at a faster rate.
C) This can be troublesome because you face a future price uncertainty problem because you don't know how much to increase your prices now or in the future.
D) It can't be troublesome; it can only be good.
E) This can be troublesome because too many customers generate deflationary pressures for all businesses.

Accepted Answer

The increase in customers could be due to inflation, leading to price confusion about whether the demand is genuine or temporary.

Question 20

Arguably,the increases in housing prices in 2005-2006:
A) caused a menu cost problem for producers.
B) caused a price confusion problem for producers.
C) caused a money illusion problem for producers.
D) caused future price uncertainty for producers.
E) caused a money illusion problem for consumers.

Accepted Answer

The answer of Arguably,the increases in housing prices in 2005-2006:
A)...

Quiz 8: The Price Level and Inflation

Define inflation.Be specific.Be sure to address whether the prices of all goods are increasing,what is included in determining the basis for changes in the price level,and how the price level is measured.

A price confusion problem is best described as:

Arguably there are three reasons why the consumer price index (CPI) overstates inflation.List the reasons and explain each one.

Using the table below,compute the consumer price index (CPI) in 2007 using 2006 as the base year.Show all your work.

The housing crisis has some roots in inflation because:

According to the price confusion problem,if the price of a product increases,then:

The website that provides official inflation statistics is:

The distinction between price confusion problems and menu costs is that:

Describe menu costs.

Why would knowing the cost of living index be important in real life? (Hint: Consider the following scenario.You get two job offers: one in San Francisco paying $80,000 per year and the other in Dallas paying $68,000 per year.)

Which of the following reflects a practical example of the price confusion problem?

Your firm expands its output in a time when demand appears to be increasing.Demand for all goods is increasing because of inflation,and consumers want to buy all goods faster because their real purchasing power is falling due to inflation.This situation could indicate that:

In some nations the only currency is gold.Someone proposes the argument that if gold were the only currency,there could not be inflation.Would you agree or disagree with this statement? Explain

In the 1970s,the government attempted to regulate prices to control inflation; this attempt was unsuccessful.The most likely reason was that:

What is the underlying concept behind future price level uncertainty?

It has been shown that increases in the money supply are directly related to the rate of inflation.If the previous statement is true,then:

Explain the notion of money illusion in specific detail.

Describe the methodology of finding the consumer price index (CPI).

You own a store and have not raised prices recently-and now your store has more customers.Which statement is correct?

Arguably,the increases in housing prices in 2005-2006: