Question 1

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

Accepted Answer

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. 
B)  Long lines at the coffee shop you own prompt you to open a new coffee shop, and the second shop is successful. 
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. 
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. 
B)  Long lines at the coffee shop you own prompt you to open a new coffee shop, and the second shop is successful. 
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. C

Question 2

The consumer price index CPI) and the gross domestic product GDP) deflator are both measures of inflation. Explain the difference between them.

Accepted Answer

The CPI tracks the prices of a "basket" of goods and services purchased by a typical consumer. This basket includes goods, like groceries and clothing, and services, like health care and education. The GDP deflator is a broader index: it includes not only consumer goods and services but also things the typical consumer would never buy, such as large farm equipment and wind turbines. As the name implies, the GDP deflator is useful in studying trends involving a nation's gross domestic product, whereas the CPI is useful for tracking the average consumer's cost of living.

Question 3

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

Accepted Answer

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. 
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. C

Question 4

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

Accepted Answer

Substitution: Consumers do not buy the s

Question 5

Refer to the following figure to answer the next  questions:
  
-As presented in the figure, one could correctly state that during the period shown

Accepted Answer

A)  the United States and the European Union generally experienced periods of both inflation and deflation. 
B)  generally, the United States experienced deflation, but the European Union experienced inflation. 
C)  generally, the European Union experienced more deflation than the United States did. 
D)  there was never a time when either the United States or the European Union experienced deflation. 
E)  there were brief periods of hyperinflation for both the United States and European Union in the 1970s and early 1980s. 
A)  the United States and the European Union generally experienced periods of both inflation and deflation. 
B)  generally, the United States experienced deflation, but the European Union experienced inflation. 
C)  generally, the European Union experienced more deflation than the United States did. 
D)  there was never a time when either the United States or the European Union experienced deflation. 
E)  there were brief periods of hyperinflation for both the United States and European Union in the 1970s and early 1980s.

Question 6

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

Accepted Answer

A)  when wages rise faster than inflation, companies lose money. 
B)  when wages rise slower than inflation, workers suffer but corporate profits increase. 
C)  inflation creates uncertainty about costs and prices, which affects both employees and employers. 
D)  all inflation will eventually lead to hyperinflation, political instability, and war. 
E)  menu costs mean restaurants have to print new menus, which is costly and unpleasant. 
A)  when wages rise faster than inflation, companies lose money. 
B)  when wages rise slower than inflation, workers suffer but corporate profits increase. 
C)  inflation creates uncertainty about costs and prices, which affects both employees and employers. 
D)  all inflation will eventually lead to hyperinflation, political instability, and war. 
E)  menu costs mean restaurants have to print new menus, which is costly and unpleasant.

Question 7

The equation M * V = P* Y is called the

Accepted Answer

A)  price-demand equation. 
B)  money-price equation. 
C)  equation of exchange. 
D)  equation of currency. 
E)  money velocity equation. 
A)  price-demand equation. 
B)  money-price equation. 
C)  equation of exchange. 
D)  equation of currency. 
E)  money velocity equation.

Question 8

According to the textbook, the top-grossing movie of all time adjusted for inflation) is

Accepted Answer

A)  Avatar. 
B)  Blade Runner. 
C)  Every Which Way but Loose. 
D)  Star Wars. 
E)  Gone with the Wind. 
A)  Avatar. 
B)  Blade Runner. 
C)  Every Which Way but Loose. 
D)  Star Wars. 
E)  Gone with the Wind.

Question 9

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

Accepted Answer

A)  Robert's real income must have risen. 
B)  Robert's real wage has increased, but we can't tell about his nominal wage. 
C)  Robert could suffer from money illusion if prices increase by 15 percent or more. 
D)  Robert could experience menu costs if the items on the "value menu" increase in price. 
E)  Robert will be confused about relative price increases and inflation. 
A)  Robert's real income must have risen. 
B)  Robert's real wage has increased, but we can't tell about his nominal wage. 
C)  Robert could suffer from money illusion if prices increase by 15 percent or more. 
D)  Robert could experience menu costs if the items on the "value menu" increase in price. 
E)  Robert will be confused about relative price increases and inflation.

Question 10

Usually in the United States and other advanced economies

Accepted Answer

A)  your real wage is more than your nominal wage. 
B)  your nominal wage is more than your real wage. 
C)  your real wage is the same as your nominal wage. 
D)  inflation increases the value of your real wage. 
E)  deflation usually occurs. 
A)  your real wage is more than your nominal wage. 
B)  your nominal wage is more than your real wage. 
C)  your real wage is the same as your nominal wage. 
D)  inflation increases the value of your real wage. 
E)  deflation usually occurs.

Question 11

According to the textbook, the fully completed house that one could buy from the Sears catalog in 1924 would be

Accepted Answer

A)  exorbitantly expensive by today's standards, adjusting for inflation. 
B)  about the typical price of a house today, adjusting for inflation. 
C)  of abnormally low quality and hence commanding a much lower price, even when adjusting for inflation. 
D)  quite a good deal, even when adjusting for inflation. 
E)  affordable to even the poorest Americans and would help to provide "sustainable growth." 
A)  exorbitantly expensive by today's standards, adjusting for inflation. 
B)  about the typical price of a house today, adjusting for inflation. 
C)  of abnormally low quality and hence commanding a much lower price, even when adjusting for inflation. 
D)  quite a good deal, even when adjusting for inflation. 
E)  affordable to even the poorest Americans and would help to provide "sustainable growth."

Question 12

The value of the consumer price index CPI) is best described as the

Accepted Answer

A)  current year prices to base year prices, holding the market basket content constant. 
B)  current year prices to base year prices, including changes in the content of the market basket. 
C)  base year prices to current year prices, holding the market basket content constant. 
D)  base year prices to current year prices, including changes in the content of the market basket. 
E)  current year quantity to base year quantity, including changes in the prices of the market basket. 
A)  current year prices to base year prices, holding the market basket content constant. 
B)  current year prices to base year prices, including changes in the content of the market basket. 
C)  base year prices to current year prices, holding the market basket content constant. 
D)  base year prices to current year prices, including changes in the content of the market basket. 
E)  current year quantity to base year quantity, including changes in the prices of the market basket.

Question 13

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 14

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 15

Describe menu costs.

Accepted Answer

When inflation occurs, producers have to

Question 16

What does the fact that most countries' economies lie near the straight, slanting line in the graph below indicate?

Accepted Answer

A)  Most countries exercise tight control over their money supplies. 
B)  The rate at which prices rise is closely tied to the rate of money supply expansion. 
C)  In most countries, the inflation rate is very low. 
D)  It is very difficult for a government to shift the inflation rate away from its natural level. 
E)  The size of the money supply is determined almost entirely by the movement of prices. 
A)  Most countries exercise tight control over their money supplies. 
B)  The rate at which prices rise is closely tied to the rate of money supply expansion. 
C)  In most countries, the inflation rate is very low. 
D)  It is very difficult for a government to shift the inflation rate away from its natural level. 
E)  The size of the money supply is determined almost entirely by the movement of prices.

Question 17

A one-pound bag of Oreos cost 32 cents in 1922 and $2.99 in 2016. Although the 2016 price is higher, there is a very real sense in which Oreos were cheaper in 2016 than in 1922. Explain, making reference to price levels.

Accepted Answer

Although the 2016 price is nominally hig

Question 18

Explain the distorting effect of inflation on the payment of capital gains taxes.

Accepted Answer

Inflation can create the appearance of c

Question 19

Explain the thinking behind Milton Friedman's famous declaration that "inflation is always and everywhere a monetary phenomenon."

Accepted Answer

Inflation is a rise in the general level

Question 20

The chained consumer price index CPI) tends to more accurately reflect prices by updating the consumer basket of goods

Accepted Answer

A)  every time any price in the typical consumer basket changes. 
B)  daily. 
C)  weekly. 
D)  monthly. 
E)  annually. 
A)  every time any price in the typical consumer basket changes. 
B)  daily. 
C)  weekly. 
D)  monthly. 
E)  annually.

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

The consumer price index CPI) and the gross domestic product GDP) deflator are both measures of inflation. Explain the difference between them.

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

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

Refer to the following figure to answer the next questions: -As presented in the figure, one could correctly state that during the period shown

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

The equation M * V = P* Y is called the

According to the textbook, the top-grossing movie of all time adjusted for inflation) is

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

Usually in the United States and other advanced economies

According to the textbook, the fully completed house that one could buy from the Sears catalog in 1924 would be

The value of the consumer price index CPI) is best described as the

Inflation creates uncertainty because

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

Describe menu costs.

What does the fact that most countries' economies lie near the straight, slanting line in the graph below indicate?

A one-pound bag of Oreos cost 32 cents in 1922 and $2.99 in 2016. Although the 2016 price is higher, there is a very real sense in which Oreos were cheaper in 2016 than in 1922. Explain, making reference to price levels.

Explain the distorting effect of inflation on the payment of capital gains taxes.

Explain the thinking behind Milton Friedman's famous declaration that "inflation is always and everywhere a monetary phenomenon."

The chained consumer price index CPI) tends to more accurately reflect prices by updating the consumer basket of goods

Five Foundations of Economics

Model Building and Gains From Trade

The Market at Work: Supply and Demand

Market Outcomes and Tax Incidence

Price Controls

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 Learning Objectives

International Trade

International Finance

Filters

Exam 8: The Price Level and Inflation

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

The consumer price index CPI) and the gross domestic product GDP) deflator are both measures of inflation. Explain the difference between them.

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

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

Refer to the following figure to answer the next questions: -As presented in the figure, one could correctly state that during the period shown

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

The equation M * V = P* Y is called the

According to the textbook, the top-grossing movie of all time adjusted for inflation) is

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

Usually in the United States and other advanced economies

According to the textbook, the fully completed house that one could buy from the Sears catalog in 1924 would be

The value of the consumer price index CPI) is best described as the

Inflation creates uncertainty because

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

Describe menu costs.

What does the fact that most countries' economies lie near the straight, slanting line in the graph below indicate?

A one-pound bag of Oreos cost 32 cents in 1922 and $2.99 in 2016. Although the 2016 price is higher, there is a very real sense in which Oreos were cheaper in 2016 than in 1922. Explain, making reference to price levels.

Explain the distorting effect of inflation on the payment of capital gains taxes.

Explain the thinking behind Milton Friedman's famous declaration that "inflation is always and everywhere a monetary phenomenon."

The chained consumer price index CPI) tends to more accurately reflect prices by updating the consumer basket of goods

Five Foundations of Economics

Model Building and Gains From Trade

The Market at Work: Supply and Demand

Market Outcomes and Tax Incidence

Price Controls

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 Learning Objectives

International Trade

International Finance

Filters