Question 1

Consider the economy represented in Figure 7.4.If actual inflation was greater than anticipated inflation,
A)Borrowers would experience a decrease in real income.
B)Lenders would experience a decrease in real income.
C)Lenders would experience an increase in real income.
D)The Federal Reserve would be forced to step in to increase lending.

Accepted Answer

The answer of  Consider the economy represented in Figure...

Question 2

Changes in relative prices may occur
A)Only in periods of stable prices.
B)Only in periods of inflation or deflation.
C)In periods of stable prices or in periods of inflation or deflation.
D)In none of the other choices.

Accepted Answer

Changes in relative prices can occur in periods of stable prices, inflation or deflation. For example, the relative price of gasoline may increase compared to the relative price of milk due to supply and demand factors, even if overall prices are stable. Similarly, during inflation or deflation, the relative prices of different goods and services can also change due to changes in demand or supply.

Question 3

Uncertainty and speculation are microeconomic effects of inflation.
Uncertainty and speculation are macroeconomic effects of inflation.

Accepted Answer

Uncertainty and speculation are considered macroeconomic effects of inflation, as they affect the overall economy and economic behavior on a larger scale.

Question 4

Money illusion results from expectations based on real purchasing power rather than current nominal income.
Money illusion is based on expectations of nominal income,not purchasing power.

Accepted Answer

Money illusion is actually opposite of the statement given in the question. It refers to people's tendency to focus on nominal income rather than real (inflation-adjusted) income or purchasing power. Therefore, the statement given is false.

Question 5

All of the following are detrimental macro consequences of inflation except
A)Uncertainty.
B)Speculation.
C)Bracket creep.
D)COLAs.

Accepted Answer

COLAs, or cost-of-living adjustments, are not detrimental consequences of inflation but rather a tool that adjusts incomes and benefits to keep up with inflation. Uncertainty, speculation, and bracket creep are all negative consequences of inflation.

Question 6

If your real income rises but your nominal income falls,then you benefit from deflation.
In this case,the price level is falling faster than your nominal income is,so your real income rises.

Accepted Answer

This is because deflation refers to a decrease in the general price level of goods and services. If the price level is falling faster than your nominal income, then goods and services become relatively cheaper, causing your real income to rise despite a decrease in nominal income.

Question 7

Redistribution of wealth is a microeconomic effect of inflation.
Assuming that buyers' nominal incomes remain constant,redistribution of wealth occurs because buyers of goods will be worse off and sellers will be better off when prices rise.

Accepted Answer

Inflation can lead to an increase in prices, which means buyers (who have fixed nominal incomes) will have to pay more for the same goods. This can result in a redistribution of wealth from buyers to sellers who benefit from the higher prices. Therefore, the statement is true.

Question 8

The most fundamental function of prices in a market economy is to provide
A)The data necessary to calculate rates of inflation.
B)The basis for the calculation of sales tax.
C)Information about the relative scarcities of resources and goods and services.
D)Maximum profits to producers.

Accepted Answer

Prices in a market economy serve as signals for the relative scarcities of resources and goods and services. When a good or service is scarce, its price will increase, signaling to producers to increase production and consumers to decrease consumption. Conversely, when a good or service is abundant, its price will decrease, signaling to producers to decrease production and consumers to increase consumption. This dynamic helps to allocate resources efficiently and promote economic growth. Prices also reflect supply and demand, which allows for the market to reach equilibrium where the quantity supplied equals the quantity demanded.

Question 9

The undesirable effects of bracket creep can be eliminated by indexing marginal tax rates.
If incomes rise due to inflation,this will move some earners into a higher tax bracket unless tax rates are indexed to the price level.

Accepted Answer

Bracket creep occurs when inflation pushes taxpayers into higher tax brackets without any real increase in their purchasing power or ability to pay taxes. Indexing marginal tax rates to inflation helps avoid this problem by adjusting tax brackets and standard deductions to keep up with the rising cost of living. This ensures that taxpayers are not penalized for simply keeping pace with inflation.

Question 10

If your nominal income remains constant at $3,000 while the price of an important product in your budget,such as cell phone service,rises from $50 to $100,your real income has
A)Decreased by $50.
B)Decreased by $100.
C)Decreased by $150.
D)Remained constant.

Accepted Answer

When the price of an important product in your budget increases, your nominal income buys less of that product, effectively decreasing your real income. In this case, the increase in the cost of cell phone service reduces the purchasing power of your nominal income by $50, the amount of the price increase.

Question 11

According to the text,which group of assets increased the most in percentage terms from 1991 to 2001?
A)Housing.
B)Gold.
C)Stocks.
D)Bonds.

Accepted Answer

The text states that "the stock market, as reflected in the S&P 500 index, went from 333 in 1991 to 1303 in 2001, an almost 4 fold increase." Therefore, stocks increased the most in percentage terms during this time period.

Question 12

The most desirable inflation rate is the rate that
A)Equals the official goal of 3 percent.
B)Has the least effect on the behavior of companies,investors,consumers,and workers.
C)Maximizes the "wealth effect" of inflation.
D)Coincides with an unemployment rate of 0 percent.

Accepted Answer

The most desirable inflation rate is the rate that has the least effect on the behavior of companies, investors, consumers, and workers. This means that the rate should be low and stable, ideally between 1-2%. A low and stable inflation rate allows for predictability, certainty, and stability in the economy which promotes economic growth and stability. Additionally, a low and stable inflation rate helps to maintain the purchasing power of consumers and ensures that their savings are not eroded by inflation.

Question 13

The core inflation rate excludes
A)Entertainment and packaging prices.
B)Food and energy prices.
C)Only energy prices for the airlines.
D)Import prices.

Accepted Answer

The core inflation rate excludes volatile components such as food and energy prices which can fluctuate greatly due to factors such as weather and geopolitical events. By excluding these components, the core inflation rate gives a more accurate measure of underlying inflation trends.

Question 14

Inflation is an increase in the average level of prices of goods and services.
On average,prices rise by the inflation rate,but some may rise faster or slower than the inflation rate.

Accepted Answer

This is true. Inflation is a general increase in the level of prices, but individual prices may rise at different rates than the inflation rate.

Question 15

The most visible consequence of inflation is
A)A rise in employment.
B)A rise in production.
C)A rise in the price level.
D)A change in government regulation.

Accepted Answer

Inflation is characterized by a general increase in prices across the economy. This means that the price level for goods and services rises over time, leading to an overall decrease in purchasing power of a currency. While employment and production may also be affected by inflation, the most visible and prominent consequence is the rise in the price level.

Question 16

If your nominal income rises faster than the price level,
A)Your real income has fallen.
B)Your real income has risen.
C)You can buy fewer goods and services.
D)There must be deflation.

Accepted Answer

When your nominal income (the actual dollar amount you earn) rises faster than the price level (the cost of goods and services), your real income (the purchasing power of your income) has increased. This means that you can buy more goods and services with your income, which is a rise in your standard of living.

Question 17

The amount of money income received in a given time period,measured in current dollars,is
A)Nominal income.
B)Fixed income.
C)Real income.
D)Asset income.

Accepted Answer

Nominal income is the amount of money income received in a given time period, measured in current dollars. It does not take into account the effects of inflation or changes in the purchasing power of money over time.

Question 18

When restaurant prices rise faster than prices of food at grocery stores,real income rises for people who visit restaurants relative to those who cook for themselves.
The real income of those who visit restaurants actually falls because the relative price of meals has increased.

Accepted Answer

If restaurant prices rise faster than grocery store prices, the relative price of meals at restaurants increases. This means that it becomes relatively more expensive to eat at restaurants compared to cooking at home. As a result, the real income of those who visit restaurants actually falls, as they have to spend more of their income to maintain their previous level of consumption at restaurants.

Question 19

Which of the following indexes tracks changes in the average prices paid by consumers?
A)CPI.
B)PPI.
C)GDP deflator.
D)The market basket.

Accepted Answer

CPI (Consumer Price Index) tracks changes in the average prices paid by consumers for a basket of goods and services, making it the best choice among the options given. PPI (Producer Price Index) tracks changes in prices paid by producers for raw materials, while GDP deflator measures the inflation of an economy as a whole. "The market basket" is not an index but rather a term used to describe the collection of goods and services used to calculate an index such as CPI.

Question 20

Relative price changes are a desirable and essential ingredient of the market mechanism.
Relative prices changes when there is a change in relative scarcity.

Accepted Answer

When there is a change in relative scarcity of goods or services, it results in a change in their relative prices. This is an important aspect of the market mechanism as it signals to buyers and sellers how to allocate resources efficiently based on the changing supply and demand conditions. Thus, relative price changes are necessary for ensuring an effective functioning of the market system.

Quiz 7: Inflation

Consider the economy represented in Figure 7.4.If actual inflation was greater than anticipated inflation,

Changes in relative prices may occur

Uncertainty and speculation are microeconomic effects of inflation. Uncertainty and speculation are macroeconomic effects of inflation.

Money illusion results from expectations based on real purchasing power rather than current nominal income. Money illusion is based on expectations of nominal income,not purchasing power.

All of the following are detrimental macro consequences of inflation except

If your real income rises but your nominal income falls,then you benefit from deflation. In this case,the price level is falling faster than your nominal income is,so your real income rises.

Redistribution of wealth is a microeconomic effect of inflation. Assuming that buyers' nominal incomes remain constant,redistribution of wealth occurs because buyers of goods will be worse off and sellers will be better off when prices rise.

The most fundamental function of prices in a market economy is to provide

The undesirable effects of bracket creep can be eliminated by indexing marginal tax rates. If incomes rise due to inflation,this will move some earners into a higher tax bracket unless tax rates are indexed to the price level.

If your nominal income remains constant at $3,000 while the price of an important product in your budget,such as cell phone service,rises from $50 to $100,your real income has

According to the text,which group of assets increased the most in percentage terms from 1991 to 2001?

The most desirable inflation rate is the rate that

The core inflation rate excludes

Inflation is an increase in the average level of prices of goods and services. On average,prices rise by the inflation rate,but some may rise faster or slower than the inflation rate.

The most visible consequence of inflation is

If your nominal income rises faster than the price level,

The amount of money income received in a given time period,measured in current dollars,is

When restaurant prices rise faster than prices of food at grocery stores,real income rises for people who visit restaurants relative to those who cook for themselves. The real income of those who visit restaurants actually falls because the relative price of meals has increased.

Which of the following indexes tracks changes in the average prices paid by consumers?

Relative price changes are a desirable and essential ingredient of the market mechanism. Relative prices changes when there is a change in relative scarcity.