Question 1

The distinction between price confusion problems and menu costs is that

Accepted Answer

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. 
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.

Question 2

The long-run inflation rate in the United States is about

Accepted Answer

A)  20 percent. 
B)  10 percent. 
C)  4 percent. 
D)  2 percent. 
E)  -4 percent. 
A)  20 percent. 
B)  10 percent. 
C)  4 percent. 
D)  2 percent. 
E)  -4 percent.

Question 3

Menu costs of inflation

Accepted Answer

A)  literally mean that restaurants are the most affected by inflation because they are constantly printing new menus. 
B)  are best described as the costs firms incur by having to change prices either on paper or in the computer. 
C)  are the costs one incurs when shopping for lower prices. 
D)  are the costs involved with only those goods whose prices are rising faster than inflation; this basket of goods represents the "menu." 
E)  mean that because we can choose what goods we consume,we have a menu of inflation from which to choose and we can "opt out" by consuming a different "basket" of consumer goods. 
A)  literally mean that restaurants are the most affected by inflation because they are constantly printing new menus. 
B)  are best described as the costs firms incur by having to change prices either on paper or in the computer. 
C)  are the costs one incurs when shopping for lower prices. 
D)  are the costs involved with only those goods whose prices are rising faster than inflation; this basket of goods represents the "menu." 
E)  mean that because we can choose what goods we consume,we have a menu of inflation from which to choose and we can "opt out" by consuming a different "basket" of consumer goods.

Question 4

Based on the weight of the consumer price index (CPI),the price of rental housing increases by 15 percent and that of owned housing by 5 percent.During the same year,the price of gasoline falls by 22 percent.We can say that

Accepted Answer

A)  the CPI would definitely fall during the year in question. 
B)  the CPI would definitely rise during the year in question. 
C)  all other factors being constant,it is likely the CPI would rise during the year in question. 
D)  all other factors being constant,it is likely the CPI would fall during the year in question. 
E)  all other factors being constant,the CPI would change by about 6 percent because that is the average housing change plus the average gasoline change. 
A)  the CPI would definitely fall during the year in question. 
B)  the CPI would definitely rise during the year in question. 
C)  all other factors being constant,it is likely the CPI would rise during the year in question. 
D)  all other factors being constant,it is likely the CPI would fall during the year in question. 
E)  all other factors being constant,the CPI would change by about 6 percent because that is the average housing change plus the average gasoline change.

Question 5

If cheeseburgers become more expensive and consumers switch their purchases away from cheeseburgers but the consumer price index (CPI)still assumes they buy the same amount,then

Accepted Answer

A)  the CPI will reflect upward bias. 
B)  the CPI will reflect downward bias. 
C)  consumers will experience money illusion. 
D)  consumers will experience a price confusion problem. 
E)  deflation will occur because consumers no longer buy cheeseburgers. 
A)  the CPI will reflect upward bias. 
B)  the CPI will reflect downward bias. 
C)  consumers will experience money illusion. 
D)  consumers will experience a price confusion problem. 
E)  deflation will occur because consumers no longer buy cheeseburgers.

Question 6

Explain how to convert a price in an earlier time into the equivalent price in today's dollars.Give a worked example and interpret the result.

Accepted Answer

The equation used is @#IMG-DLM& where the two pric

Question 7

Let's say a company invents a very popular device called a Zorgon,which allows you to send small items via a transporter from one place to another.This would affect the consumer price index (CPI)in the sense that the CPI

Accepted Answer

A)  would fail to include purchases of the Zorgon for some period of time after the product entered the market. 
B)  would overstate the cost of the Zorgon because the price would fall over time but the CPI would always be "catching up" and be behind the price decreases. 
C)  would take into account substitution between the Zorgon and the use of shipping services such as FedEx and UPS as the relative price of these changed. 
D)  would fail to take into account the quality of the Zorgon. 
E)  always accurately measures the cost of living. 
A)  would fail to include purchases of the Zorgon for some period of time after the product entered the market. 
B)  would overstate the cost of the Zorgon because the price would fall over time but the CPI would always be "catching up" and be behind the price decreases. 
C)  would take into account substitution between the Zorgon and the use of shipping services such as FedEx and UPS as the relative price of these changed. 
D)  would fail to take into account the quality of the Zorgon. 
E)  always accurately measures the cost of living.

Question 8

If a bank expects inflation to increase in the near future,how will it respond?

Accepted Answer

A)  It will start paying less interest on deposits. 
B)  It will seek to reduce the amount of cash held in its vaults. 
C)  It will temporarily scale back its efforts to gain new customers. 
D)  It will start charging more interest on loans. 
E)  It will temporarily suspend withdrawals. 
A)  It will start paying less interest on deposits. 
B)  It will seek to reduce the amount of cash held in its vaults. 
C)  It will temporarily scale back its efforts to gain new customers. 
D)  It will start charging more interest on loans. 
E)  It will temporarily suspend withdrawals.

Question 9

In Bovania,milk constitutes 56 percent of the typical basket of goods for a typical consumer.Let's say the price of milk rises by 4 percent and the prices of all other goods fall by 10 percent.Based on the information given,we can definitely say

Accepted Answer

A)  the consumer price index (CPI)in Bovania is greater than in the previous year. 
B)  the consumer price index (CPI)in Bovania is less than in the previous year. 
C)  if consumers get a 4 percent pay raise,they are worse off in terms of their real income compared to inflation as measured by the Bovanian consumer price index (CPI). 
D)  because milk is a necessity,consumers are automatically worse off no matter what pay increase they may have received. 
E)  shoe-leather costs have decreased. 
A)  the consumer price index (CPI)in Bovania is greater than in the previous year. 
B)  the consumer price index (CPI)in Bovania is less than in the previous year. 
C)  if consumers get a 4 percent pay raise,they are worse off in terms of their real income compared to inflation as measured by the Bovanian consumer price index (CPI). 
D)  because milk is a necessity,consumers are automatically worse off no matter what pay increase they may have received. 
E)  shoe-leather costs have decreased.

Question 10

Suppose a basket of goods and services has been selected to calculate the consumer price index (CPI)and 2002 has been selected as the base year.In 2002,the basket's cost was $600; in 2004,the basket's cost was $650; and in 2006,the basket's cost was $700.The value of the CPI in 2004 was (rounded to one decimal place)

Accepted Answer

A)  92.3. 
B)  106.3. 
C)  108.3. 
D)  152.0. 
E)  more than 155.0. 
A)  92.3. 
B)  106.3. 
C)  108.3. 
D)  152.0. 
E)  more than 155.0.

Question 11

Inflation creates uncertainty because

Accepted Answer

A)  nominal values of prices and wages are unknown. 
B)  it rapidly increases output. 
C)  real interest rates,prices,and wages are unknown. 
D)  borrowing continues at a rapid pace,creating a "false boom." 
E)  although price confusion problems are eliminated,the shoe-leather costs are exacerbated. 
A)  nominal values of prices and wages are unknown. 
B)  it rapidly increases output. 
C)  real interest rates,prices,and wages are unknown. 
D)  borrowing continues at a rapid pace,creating a "false boom." 
E)  although price confusion problems are eliminated,the shoe-leather costs are exacerbated.

Question 12

Your entertainment price index (EPI)was computed based on three goods: movie tickets,popcorn,and limeade.If you change the quantity of these goods from this year to next year and the prices of two of the three goods increase while the other price falls,then your EPI

Accepted Answer

A)  would definitely fall during the year in question if,and only if,you buy less of all the goods in question. 
B)  would definitely rise during the year in question because two of the three goods became more expensive. 
C)  might rise or fall,contingent on both the quantity of the goods that you bought and the prices of these goods. 
D)  might rise or fall,contingent only on the quantity of the goods that you bought and regardless of the prices of these goods. 
E)  might rise or fall,contingent only on the percentage of the market basket that these goods constituted and the percentage that each good occupied within the basket,regardless of the quantity change from year to year. 
A)  would definitely fall during the year in question if,and only if,you buy less of all the goods in question. 
B)  would definitely rise during the year in question because two of the three goods became more expensive. 
C)  might rise or fall,contingent on both the quantity of the goods that you bought and the prices of these goods. 
D)  might rise or fall,contingent only on the quantity of the goods that you bought and regardless of the prices of these goods. 
E)  might rise or fall,contingent only on the percentage of the market basket that these goods constituted and the percentage that each good occupied within the basket,regardless of the quantity change from year to year.

Question 13

If a Hershey's chocolate bar cost $0.05 in 1921 when the price index was 18 and the same size and weight Hershey's chocolate bar cost $0.05 in 1955 when the price index was 27,then

Accepted Answer

A)  the inflation-adjusted price of the bar would be lower in 1955 than in 1921. 
B)  the inflation-adjusted price of the bar would be higher in 1955 than in 1921. 
C)  Hershey's mispriced the bar due to a price confusion problem. 
D)  the United States must have experienced deflation during the period from 1921-1955. 
E)  menu costs for Hershey's were high. 
A)  the inflation-adjusted price of the bar would be lower in 1955 than in 1921. 
B)  the inflation-adjusted price of the bar would be higher in 1955 than in 1921. 
C)  Hershey's mispriced the bar due to a price confusion problem. 
D)  the United States must have experienced deflation during the period from 1921-1955. 
E)  menu costs for Hershey's were high.

Question 14

The textbook shows that the inflation-adjusted movie receipts for Titanic (released in 1997)were $3,205,455,051 in 2015 and the original receipts were $2,186,772,302.The implication is that

Accepted Answer

A)  prices were about the same in 2015 as in 1997. 
B)  hyperinflation has occurred since 1997. 
C)  prices were about one-third lower in 2015 than they had been in 1997. 
D)  prices were roughly 50% higher in 2015 than they had been in 1997. 
E)  Titanic was a bad movie at the time of its release but has become more popular over time. 
A)  prices were about the same in 2015 as in 1997. 
B)  hyperinflation has occurred since 1997. 
C)  prices were about one-third lower in 2015 than they had been in 1997. 
D)  prices were roughly 50% higher in 2015 than they had been in 1997. 
E)  Titanic was a bad movie at the time of its release but has become more popular over time.

Question 15

If mustard now costs $0.75 when today's price index is 225,and if the price index in 1970 was 38,we would most accurately say that

Accepted Answer

A)  mustard cost about $4.44 in 1970. 
B)  if mustard cost $0.10 in 1970,it was relatively cheap as an inflation-adjusted price. 
C)  mustard cost about $0.20 in 1970. 
D)  mustard's price would never increase at the same rate as inflation because it is a food item. 
E)  ketchup would cost about $0.13 in 1970 because it typically costs about the same as mustard. 
A)  mustard cost about $4.44 in 1970. 
B)  if mustard cost $0.10 in 1970,it was relatively cheap as an inflation-adjusted price. 
C)  mustard cost about $0.20 in 1970. 
D)  mustard's price would never increase at the same rate as inflation because it is a food item. 
E)  ketchup would cost about $0.13 in 1970 because it typically costs about the same as mustard.

Question 16

You have to pay costs for your business now,but you also have to enter into contracts to pay wages and supply costs in the future.If inflation occurs,the best term for the problem that arises in this case is

Accepted Answer

A)  menu costs. 
B)  price confusion. 
C)  future price uncertainty. 
D)  deflationary price pressures. 
E)  present value/future value uncertainty. 
A)  menu costs. 
B)  price confusion. 
C)  future price uncertainty. 
D)  deflationary price pressures. 
E)  present value/future value uncertainty.

Question 17

What is the difference between the consumer price index (CPI)and the gross domestic product (GDP)deflator?

Accepted Answer

A)  Under normal circumstances,the CPI is the better measure of the overall price level. 
B)  If inflation is high,the CPI is the better measure of the overall price level; if inflation is low or deflation is occurring,the GDP deflator is the better measure. 
C)  The GDP deflator is used only during periods of deflation; the rest of the time we use the CPI to measure the overall price level. 
D)  If we want to examine how price changes affect the overall economy,the GDP deflator is the better measure. 
E)  The CPI must be equal to the GDP deflator because of the "equation of consumer homogeneity." 
A)  Under normal circumstances,the CPI is the better measure of the overall price level. 
B)  If inflation is high,the CPI is the better measure of the overall price level; if inflation is low or deflation is occurring,the GDP deflator is the better measure. 
C)  The GDP deflator is used only during periods of deflation; the rest of the time we use the CPI to measure the overall price level. 
D)  If we want to examine how price changes affect the overall economy,the GDP deflator is the better measure. 
E)  The CPI must be equal to the GDP deflator because of the "equation of consumer homogeneity."

Question 18

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

Accepted Answer

A)  that both real and nominal wages are rising. 
B)  that both real and nominal wages are falling. 
C)  almost none,because most wages increase at about the same rate as inflation. 
D)  that holding nominal wages constant,the real wage would rise. 
E)  that holding nominal wages constant,the real wage would fall. 
A)  that both real and nominal wages are rising. 
B)  that both real and nominal wages are falling. 
C)  almost none,because most wages increase at about the same rate as inflation. 
D)  that holding nominal wages constant,the real wage would rise. 
E)  that holding nominal wages constant,the real wage would fall.

Question 19

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

Inflation is an increase in the overall

Question 20

Inflation necessarily occurs when

Accepted Answer

A)  the price of gasoline rises. 
B)  a greater number of goods increase in price compared to the number of goods that undergo a price decrease. 
C)  the overall price level,such as the consumer price index (CPI),rises. 
D)  there is an increase in the rate of change in the price level. 
E)  the price of at least one good,but possibly more than one good,in the economy increases. 
A)  the price of gasoline rises. 
B)  a greater number of goods increase in price compared to the number of goods that undergo a price decrease. 
C)  the overall price level,such as the consumer price index (CPI),rises. 
D)  there is an increase in the rate of change in the price level. 
E)  the price of at least one good,but possibly more than one good,in the economy increases.

Exam 21: The Price Level and Inflation

The distinction between price confusion problems and menu costs is that

The long-run inflation rate in the United States is about

Menu costs of inflation

Based on the weight of the consumer price index (CPI),the price of rental housing increases by 15 percent and that of owned housing by 5 percent.During the same year,the price of gasoline falls by 22 percent.We can say that

If cheeseburgers become more expensive and consumers switch their purchases away from cheeseburgers but the consumer price index (CPI)still assumes they buy the same amount,then

Explain how to convert a price in an earlier time into the equivalent price in today's dollars.Give a worked example and interpret the result.

Let's say a company invents a very popular device called a Zorgon,which allows you to send small items via a transporter from one place to another.This would affect the consumer price index (CPI)in the sense that the CPI

If a bank expects inflation to increase in the near future,how will it respond?

In Bovania,milk constitutes 56 percent of the typical basket of goods for a typical consumer.Let's say the price of milk rises by 4 percent and the prices of all other goods fall by 10 percent.Based on the information given,we can definitely say

Inflation creates uncertainty because

Your entertainment price index (EPI)was computed based on three goods: movie tickets,popcorn,and limeade.If you change the quantity of these goods from this year to next year and the prices of two of the three goods increase while the other price falls,then your EPI

If a Hershey's chocolate bar cost $0.05 in 1921 when the price index was 18 and the same size and weight Hershey's chocolate bar cost $0.05 in 1955 when the price index was 27,then

The textbook shows that the inflation-adjusted movie receipts for Titanic (released in 1997)were $3,205,455,051 in 2015 and the original receipts were $2,186,772,302.The implication is that

If mustard now costs $0.75 when today's price index is 225,and if the price index in 1970 was 38,we would most accurately say that

You have to pay costs for your business now,but you also have to enter into contracts to pay wages and supply costs in the future.If inflation occurs,the best term for the problem that arises in this case is

What is the difference between the consumer price index (CPI)and the gross domestic product (GDP)deflator?

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

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.

Inflation necessarily occurs when

Five Foundations of Economics

Model Building and Gains From Trade

The Market at Work: Supply and Demand

Elasticity

Market Outcomes and Tax Incidence

Price Controls

Market Inefficiencies: Externalities and Public Goods

Business Costs and Production

Firms in a Competitive Market

Understanding Monopoly

Price Discrimination

Monopolistic Competition and Advertising

Oligopoly and Strategic Behavior

The Demand and Supply of Resources

Income,inequality,and Poverty

Consumer Choice

Behavioral Economics and Risk Taking

Health Insurance and Health Care

Introduction to Macroeconomics and Gross Domestic Product

Unemployment

Savings,interest Rates,and the Market for Loanable Funds

Financial Markets and Securities

Economic Growth and the Wealth of Nations

Growth Theory

The Aggregate Demandaggregate Supply Model

The Great Recession, the Great Depression, and Great Macroeconomic Debates

Federal Budgets: the Tools of Fiscal Policy

Fiscal Policy

Money and the Federal Reserve

Monetary Policy

International Trade

International Finance

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