Question 1

Cost-push inflation can be caused by

Accepted Answer

Cost-push inflation occurs when increases in production costs, such as wages, lead to increased prices. In this case, real wage increases that are higher than increases in productivity growth lead to higher production costs, forcing producers to raise their prices, causing inflation.

Question 2

Does inflation mean that consumers can no longer afford to buy as many goods and services due to the higher prices? Explain.

Accepted Answer

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Question 3

What is hyperinflation?

Accepted Answer

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Question 4

Hyperinflation is caused by a country's central bank when it reduces liquidity,thereby creating a shortage of money,leading to inflation.

Accepted Answer

Hyperinflation is not caused by a reduction in liquidity by a central bank, but rather by an excessive increase in the money supply without a corresponding increase in the production of goods and services. This can be caused by various factors such as government budget deficits, war, and corruption.

Question 5

Inflation redistributes income to a greater extent when the inflation is unanticipated.

Accepted Answer

When inflation is unanticipated, some people may have already entered into fixed nominal contracts (such as fixed wages or rents) that don't adjust to inflation, which means they will experience a decrease in their real income. On the other hand, people who hold assets that increase in value with inflation (such as real estate or commodities) will see an increase in their real income. Therefore, the inflation redistributes income to a greater extent than if it was anticipated.

Question 6

What is deflation and what effect does deflation have on borrowers of money and on asset values?

Accepted Answer

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Question 7

During times of deflation,borrowers of money can lose,as their debt burden increases.

Accepted Answer

During deflation, the value of money increases, meaning borrowers have to pay back their loans with money that is worth more than when they originally borrowed it, effectively increasing their debt burden.

Question 8

Anticipated inflation increases the amount of taxation paid by firms and individuals.

Accepted Answer

As inflation increases, the value of money decreases, causing prices of goods and services to rise. This leads to an increase in the cost of living and production, which can result in higher taxes to sustain government revenue.

Question 9

Describe how a lender can lose from inflation if the inflation is unanticipated and the loan is a fixed-interest-rate loan.How would a variable-interest-rate loan (one that adjusts over the contract period)eliminate these losses?

Accepted Answer

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Question 10

Hyperinflation occurred in Germany after World War I,when its inflation rate rose to 3.25 million per cent.

Accepted Answer

This statement is true. Hyperinflation in Germany occurred after World War I, with the inflation rate rising to 3.25 million percent at its peak in November 1923. This inflation was caused by a combination of factors, including war reparations and government printing money to pay for them, leading to a significant devaluation of the currency.

Question 11

Demand-pull inflation is caused by

Accepted Answer

Demand-pull inflation occurs when there is an increase in aggregate demand in the short run, which puts upward pressure on prices as producers struggle to meet the demand with their current supply.

Question 12

The problem with inflation is that as prices rise most consumers can no longer afford to buy as many goods and services.

Accepted Answer

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Question 13

Describe how inflation can be costly even if it is anticipated.

Accepted Answer

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Question 14

Which of the following can cause demand-pull inflation if the economy is currently in equilibrium at full-employment GDP?

Accepted Answer

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Question 15

Demand-pull inflation is characterised by

Accepted Answer

Demand-pull inflation occurs when aggregate demand in an economy outpaces aggregate supply, leading to higher prices and increased employment in the short run as businesses hire more workers to meet the higher demand.

Question 16

Which of the following is not a potential problem of deflation?

Accepted Answer

Expectations of future price falls may actually lead to increased spending and investment as consumers and businesses anticipate lower prices in the future. This is because they may choose to delay spending and investment when they believe prices will increase in the future (which is the case with inflation), but they may decide to bring forward spending and investment when they anticipate lower prices (which is the case with deflation). Therefore, D is not a potential problem of deflation. A, B, and C are all potential problems of deflation.

Question 17

Deflation occurs when the price level becomes negative.

Accepted Answer

Deflation is a decrease in the general price level of goods and services, but it does not result in negative prices. It is the opposite of inflation.

Question 18

Deflation occurs when there is a

Accepted Answer

Deflation refers to a sustained decline in the general price level of goods and services in an economy. This means that over a period of time, prices are continuously decreasing. A one-time decrease in prices does not necessarily indicate deflation.

Question 19

There are no costs to inflation if it is fully anticipated.

Accepted Answer

Even if inflation is fully anticipated, there are still costs such as menu costs (the costs of changing prices), shoe leather costs (the costs associated with more frequent transactions or withdrawals of money), and the distortions it can cause in taxation and savings.

Question 20

Explain why you would rather be a borrower during a period of unexpected rising inflation and a lender during a period of unexpected declining inflation.

Accepted Answer

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Quiz 13: Unemployment and Inflation