Question 1

Inflation is not a problem

Accepted Answer

A)  if it is under 15 percent, as it usually is in the United States. 
B)  if salaries rise at a slower rate than inflation. 
C)  if the prices of some goods fall even though the prices of others might be rising. 
D)  except that when it occurs, it creates uncertainty over future prices along with other possible deleterious effects). 
E)  and is not preferred when compared to deflation. 
A)  if it is under 15 percent, as it usually is in the United States. 
B)  if salaries rise at a slower rate than inflation. 
C)  if the prices of some goods fall even though the prices of others might be rising. 
D)  except that when it occurs, it creates uncertainty over future prices along with other possible deleterious effects). 
E)  and is not preferred when compared to deflation.

Question 2

Quality changes are

Accepted Answer

A)  easily accounted for in the consumer price index CPI). 
B)  always included in the consumer price index CPI). 
C)  included in the gross domestic product GDP) deflator but not the consumer price index CPI). 
D)  generally included in both the consumer price index CPI) and the gross domestic product GDP) deflator. 
E)  at least partially adjusted for in the consumer price index CPI). 
A)  easily accounted for in the consumer price index CPI). 
B)  always included in the consumer price index CPI). 
C)  included in the gross domestic product GDP) deflator but not the consumer price index CPI). 
D)  generally included in both the consumer price index CPI) and the gross domestic product GDP) deflator. 
E)  at least partially adjusted for in the consumer price index CPI).

Question 3

Tofu becomes more expensive in 2008 at Safeway/Vons in Laguna Nigel, California. This means

Accepted Answer

A)  the consumer price index CPI) will rise in 2008 if, and only if, Laguna Nigel is one of the considered 38 geographic locations and tofu is one of the 8,000 goods included in the CPI. 
B)  the consumer price index CPI) will almost certainly rise in 2008, even if Laguna Nigel is not included in the index, as long as tofu is included and becomes more expensive on average at the other locations. 
C)  the consumer price index CPI) will likely fall in 2008) if the average weighted price of tofu increases in the United States and the price of tofu at Safeway/Vons makes almost no difference in the CPI. 
D)  the consumer price index CPI) might rise or fall in 2008) and the price of tofu at Safeway/Vons could make a very small difference in the CPI if tofu at Safeway/Vons is included in the index. But because tofu is a relatively large portion of the entire CPI, it is most likely the CPI will rise. 
E)  tofu, even if included in the consumer price index CPI) in 2008, would make a small difference on the average weighted price of food and beverages. Food and beverages only constitute a small portion of the CPI, and hence, this would be unlikely to affect the overall CPI by any significant amount. 
A)  the consumer price index CPI) will rise in 2008 if, and only if, Laguna Nigel is one of the considered 38 geographic locations and tofu is one of the 8,000 goods included in the CPI. 
B)  the consumer price index CPI) will almost certainly rise in 2008, even if Laguna Nigel is not included in the index, as long as tofu is included and becomes more expensive on average at the other locations. 
C)  the consumer price index CPI) will likely fall in 2008) if the average weighted price of tofu increases in the United States and the price of tofu at Safeway/Vons makes almost no difference in the CPI. 
D)  the consumer price index CPI) might rise or fall in 2008) and the price of tofu at Safeway/Vons could make a very small difference in the CPI if tofu at Safeway/Vons is included in the index. But because tofu is a relatively large portion of the entire CPI, it is most likely the CPI will rise. 
E)  tofu, even if included in the consumer price index CPI) in 2008, would make a small difference on the average weighted price of food and beverages. Food and beverages only constitute a small portion of the CPI, and hence, this would be unlikely to affect the overall CPI by any significant amount.

Question 4

In 1940 you could buy a "nickel Pepsi" for oddly enough) a nickel. If the price index in 1940 was 14 and the 2011 price index was 221, then the inflation-adjusted price of a Pepsi would be

Accepted Answer

A)  a nickel $0.05). 
B)  a dime $0.10). 
C)  about 79 cents $0.79). 
D)  about $1.21. 
E)  $0.00317. 
A)  a nickel $0.05). 
B)  a dime $0.10). 
C)  about 79 cents $0.79). 
D)  about $1.21. 
E)  $0.00317.

Question 5

Which case in the below table describes what has happened in the U.S. economy over the last decade? $\Delta$ + $\Delta$ $\Delta$ + $\Delta$ $\begin{array}{lllll}
&\% \Delta \mathrm{M} +&=\Delta \mathrm{V} &=\Delta \mathrm{P}+&\% \Delta \mathrm{Y}\
\hline &\text { Money growth } & \text { Velocity growth } & \text { Inflation } & \text { Real GDP growth }\
\hline \text { Case 1 } & \text { positive } & \text { zero } & \text { zero } & \text { negative } \
\text { Case 2 } & \text { large positive } & \text { negative } & \text { positive } & \text { positive } \
\text { Case 3 } & \text { zero } & \text { large positive } & \text { positive } & \text { positive } \
\text { Case 4 } & \text { positive } & \text { positive } & \text { zero } & \text { large positive } \
\text { Case 5 } & \text { positive } & \text { positive } & \text { large } & \text { negative } \
& & & \text { positive } & \
\hline
\end{array}$

Accepted Answer

A)  Case 1 
B)  Case 2 
C)  Case 3 
D)  Case 4 
E)  Case 5 
A)  Case 1 
B)  Case 2 
C)  Case 3 
D)  Case 4 
E)  Case 5

Question 6

Chicken becomes more expensive in 2008 at Wegmans in State College, Pennsylvania. This means

Accepted Answer

A)  the consumer price index CPI) will rise in 2008 if, and only if, State College is one of the 38 geographic locations and chickens are one of the 8,000 goods included in the CPI. 
B)  the consumer price index CPI) will almost certainly rise in 2008, even if State College is not included, as long as chicken is included and becomes more expensive on average at the indexed locations. 
C)  the consumer price index CPI) will likely fall if the average weighted price of chicken increases in the United States and the price of chicken at Wegmans makes almost no difference in the CPI. 
D)  the consumer price index CPI) might rise or fall and the price of chicken at Wegmans could make a very small difference in the CPI if chicken at Wegmans is included in the index. However, chicken would be a relatively small portion of the entire CPI, if it is included at all. 
E)  chicken prices are never included in the consumer price index CPI) because the creator of the CPI, James Gapinski, did not like chickens. 
A)  the consumer price index CPI) will rise in 2008 if, and only if, State College is one of the 38 geographic locations and chickens are one of the 8,000 goods included in the CPI. 
B)  the consumer price index CPI) will almost certainly rise in 2008, even if State College is not included, as long as chicken is included and becomes more expensive on average at the indexed locations. 
C)  the consumer price index CPI) will likely fall if the average weighted price of chicken increases in the United States and the price of chicken at Wegmans makes almost no difference in the CPI. 
D)  the consumer price index CPI) might rise or fall and the price of chicken at Wegmans could make a very small difference in the CPI if chicken at Wegmans is included in the index. However, chicken would be a relatively small portion of the entire CPI, if it is included at all. 
E)  chicken prices are never included in the consumer price index CPI) because the creator of the CPI, James Gapinski, did not like chickens.

Question 7

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

Accepted Answer

The prices of 8,000 goods and services a

Question 8

Oranges become more expensive in 2008 at Ukrop's in Charlottesville, Virginia. This means

Accepted Answer

A)  the consumer price index CPI) will rise in 2008 if, and only if, Charlottesville is one of the 38 indexed geographic locations and oranges are one of the 8,000 goods included in the CPI. 
B)  the consumer price index CPI) will almost certainly rise in 2008, even if Charlottesville is not included, as long as oranges are included and become more expensive on average at the other indexed locations. 
C)  the consumer price index CPI) will likely fall if the average weighted price of oranges increases in the United States and the price of oranges at Ukrop's makes almost no difference in the CPI. 
D)  the consumer price index CPI) might rise or fall and the price of oranges at Ukrop's could make a very small difference in the CPI if oranges at Ukrop's are included. However, oranges would be a relatively small portion of the entire CPI, if they are included in it at all. 
E)  orange prices are never included in the consumer price index CPI) because the creator of the CPI, Milton Marquis, did not like oranges. 
A)  the consumer price index CPI) will rise in 2008 if, and only if, Charlottesville is one of the 38 indexed geographic locations and oranges are one of the 8,000 goods included in the CPI. 
B)  the consumer price index CPI) will almost certainly rise in 2008, even if Charlottesville is not included, as long as oranges are included and become more expensive on average at the other indexed locations. 
C)  the consumer price index CPI) will likely fall if the average weighted price of oranges increases in the United States and the price of oranges at Ukrop's makes almost no difference in the CPI. 
D)  the consumer price index CPI) might rise or fall and the price of oranges at Ukrop's could make a very small difference in the CPI if oranges at Ukrop's are included. However, oranges would be a relatively small portion of the entire CPI, if they are included in it at all. 
E)  orange prices are never included in the consumer price index CPI) because the creator of the CPI, Milton Marquis, did not like oranges.

Question 9

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 10

Inflation is occurring in a nation; the implications) 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 11

Deflation is best described as when

Accepted Answer

A)  all prices in the economy fall. 
B)  the prices of some goods rise and prices of some goods fall, but more goods have price increases than decreases. 
C)  the prices of some goods rise and prices of some goods fall, but fewer goods have price increases than decreases. 
D)  the overall level of prices of goods falls. 
E)  the overall level of prices of goods rises. 
A)  all prices in the economy fall. 
B)  the prices of some goods rise and prices of some goods fall, but more goods have price increases than decreases. 
C)  the prices of some goods rise and prices of some goods fall, but fewer goods have price increases than decreases. 
D)  the overall level of prices of goods falls. 
E)  the overall level of prices of goods rises.

Question 12

Consider a nation in which the price index last year was 130 and this year it is 150. Which statement is correct?

Accepted Answer

A)  Inflation was 20 percent this year. 
B)  Deflation was 20 percent this year. 
C)  Housing prices must have risen. 
D)  Inflation was 15 percent this year. 
E)  Deflation was 15 percent this year. 
A)  Inflation was 20 percent this year. 
B)  Deflation was 20 percent this year. 
C)  Housing prices must have risen. 
D)  Inflation was 15 percent this year. 
E)  Deflation was 15 percent this year.

Question 13

If 51 percent of all goods in the consumer price index CPI) became more expensive and 49 percent became cheaper

Accepted Answer

A)  inflation would certainly occur. 
B)  deflation would most likely occur. 
C)  inflation or deflation could occur, depending on the weight of these goods in the basket of goods and the actual percentage changes. 
D)  deflation would certainly occur if the price of housing was one of the goods that fell. 
E)  inflation would occur if the goods whose prices increased did so by the same percentage as the goods whose prices decreased. 
A)  inflation would certainly occur. 
B)  deflation would most likely occur. 
C)  inflation or deflation could occur, depending on the weight of these goods in the basket of goods and the actual percentage changes. 
D)  deflation would certainly occur if the price of housing was one of the goods that fell. 
E)  inflation would occur if the goods whose prices increased did so by the same percentage as the goods whose prices decreased.

Question 14

Milton Friedman, who won the Nobel Prize in Economics, characterized inflation as being "high and variable." These characteristics of inflation create problems because

Accepted Answer

A)  of future price uncertainty. 
B)  of arbitrage. 
C)  of the signal emissions problem. 
D)  deflation could occur. 
E)  inflation always becomes hyperinflation. 
A)  of future price uncertainty. 
B)  of arbitrage. 
C)  of the signal emissions problem. 
D)  deflation could occur. 
E)  inflation always becomes hyperinflation.

Question 15

In Bovania, cattle compose 48 percent of the consumer price index CPI), housing composes 32 percent, and entertainment accounts for the remaining 20 percent. If, in a certain year, the price of cattle rises by 30 percent and the price of housing rises by 25 percent, then

Accepted Answer

A)  the value of the CPI must rise, no matter what happens to the price of entertainment, because two-thirds of the CPI is more expensive. 
B)  the CPI has increased, as long as the price of entertainment does not fall by more than 55 percent. 
C)  the CPI has increased, even if the entertainment in the next year is free. 
D)  the CPI has decreased if the price of entertainment falls by more than 27.5 percent. 
E)  it is not possible to tell what would happen to the CPI because it is certain that the goods included in the CPI must change. 
A)  the value of the CPI must rise, no matter what happens to the price of entertainment, because two-thirds of the CPI is more expensive. 
B)  the CPI has increased, as long as the price of entertainment does not fall by more than 55 percent. 
C)  the CPI has increased, even if the entertainment in the next year is free. 
D)  the CPI has decreased if the price of entertainment falls by more than 27.5 percent. 
E)  it is not possible to tell what would happen to the CPI because it is certain that the goods included in the CPI must change.

Question 16

The concept of a price index is that it is an)

Accepted Answer

A)  measure of how the items included in the typical basket of goods have changed over time; it also includes price changes over time. 
B)  measure of how the items included in the typical basket of goods have changed over time, while holding price changes constant. 
C)  measure of how the prices included in the typical basket of goods have changed over time, holding the items in the consumption bundle constant. 
D)  index of how much gasoline prices have increased, because all prices follow the price of gasoline. 
E)  index of how much housing prices have changed, because housing is the most important item in the consumption bundle. 
A)  measure of how the items included in the typical basket of goods have changed over time; it also includes price changes over time. 
B)  measure of how the items included in the typical basket of goods have changed over time, while holding price changes constant. 
C)  measure of how the prices included in the typical basket of goods have changed over time, holding the items in the consumption bundle constant. 
D)  index of how much gasoline prices have increased, because all prices follow the price of gasoline. 
E)  index of how much housing prices have changed, because housing is the most important item in the consumption bundle.

Question 17

Three accuracy problems with the consumer price index CPI) are

Accepted Answer

A)  the income effect, substitution effect, and money illusion. 
B)  substitution, quality changes, and the money illusion. 
C)  price confusion, substitution, and quality changes. 
D)  substitution, quality changes, and the availability of new goods and services. 
E)  the availability of new goods and services, substitution, and traditional bundle bias. 
A)  the income effect, substitution effect, and money illusion. 
B)  substitution, quality changes, and the money illusion. 
C)  price confusion, substitution, and quality changes. 
D)  substitution, quality changes, and the availability of new goods and services. 
E)  the availability of new goods and services, substitution, and traditional bundle bias.

Question 18

Deflation

Accepted Answer

A)  automatically implies that, on average, everyone is better off because prices have fallen. 
B)  would negatively affect producers but positively affect consumers because producers must accept lower prices. 
C)  might easily make both producers and consumers better off because consumers might lose jobs due to falling prices and profit margins, and the falling profit margins would negatively impact producers. 
D)  might make you better off if your nominal wages fall more rapidly than prices. 
E)  automatically occurs when there are more goods with falling prices than there are goods with increasing prices. 
A)  automatically implies that, on average, everyone is better off because prices have fallen. 
B)  would negatively affect producers but positively affect consumers because producers must accept lower prices. 
C)  might easily make both producers and consumers better off because consumers might lose jobs due to falling prices and profit margins, and the falling profit margins would negatively impact producers. 
D)  might make you better off if your nominal wages fall more rapidly than prices. 
E)  automatically occurs when there are more goods with falling prices than there are goods with increasing prices.

Question 19

In Felixania, cat food constitutes 45 percent of the typical basket of goods for a typical consumer, dog food constitutes 3 percent, and all other goods constitute the remaining 52 percent. Assume the price of cat food rises by 4 percent, the price of dog food falls by 10 percent, and the prices for all other goods remain constant. Based on the information given, we can definitely say

Accepted Answer

A)  because all consumers are the same, all consumers must be worse off as a result of the change. 
B)  because the goods included in the consumer price index CPI) necessarily change from year to year, we can't determine the value of the new CPI. 
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 Felixanian consumer price index CPI). 
D)  if consumers get a 4 percent pay raise, they are better off in terms of their real income compared to inflation as measured by the Felixanian consumer price index CPI). 
E)  menu costs have decreased. 
A)  because all consumers are the same, all consumers must be worse off as a result of the change. 
B)  because the goods included in the consumer price index CPI) necessarily change from year to year, we can't determine the value of the new CPI. 
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 Felixanian consumer price index CPI). 
D)  if consumers get a 4 percent pay raise, they are better off in terms of their real income compared to inflation as measured by the Felixanian consumer price index CPI). 
E)  menu costs have decreased.

Question 20

Explain why in industry it is important for both employers and workers to have an accurate measure of inflation.

Accepted Answer

Employers set salaries based on what the

Inflation is not a problem

Quality changes are

Tofu becomes more expensive in 2008 at Safeway/Vons in Laguna Nigel, California. This means

In 1940 you could buy a "nickel Pepsi" for oddly enough) a nickel. If the price index in 1940 was 14 and the 2011 price index was 221, then the inflation-adjusted price of a Pepsi would be

Chicken becomes more expensive in 2008 at Wegmans in State College, Pennsylvania. This means

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

Oranges become more expensive in 2008 at Ukrop's in Charlottesville, Virginia. This means

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

Inflation is occurring in a nation; the implications) of this is/are

Deflation is best described as when

Consider a nation in which the price index last year was 130 and this year it is 150. Which statement is correct?

If 51 percent of all goods in the consumer price index CPI) became more expensive and 49 percent became cheaper

Milton Friedman, who won the Nobel Prize in Economics, characterized inflation as being "high and variable." These characteristics of inflation create problems because

In Bovania, cattle compose 48 percent of the consumer price index CPI), housing composes 32 percent, and entertainment accounts for the remaining 20 percent. If, in a certain year, the price of cattle rises by 30 percent and the price of housing rises by 25 percent, then

The concept of a price index is that it is an)

Three accuracy problems with the consumer price index CPI) are

Deflation

Explain why in industry it is important for both employers and workers to have an accurate measure of inflation.

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

Inflation is not a problem

Quality changes are

Tofu becomes more expensive in 2008 at Safeway/Vons in Laguna Nigel, California. This means

In 1940 you could buy a "nickel Pepsi" for oddly enough) a nickel. If the price index in 1940 was 14 and the 2011 price index was 221, then the inflation-adjusted price of a Pepsi would be

Chicken becomes more expensive in 2008 at Wegmans in State College, Pennsylvania. This means

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

Oranges become more expensive in 2008 at Ukrop's in Charlottesville, Virginia. This means

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

Inflation is occurring in a nation; the implications) of this is/are

Deflation is best described as when

Consider a nation in which the price index last year was 130 and this year it is 150. Which statement is correct?

If 51 percent of all goods in the consumer price index CPI) became more expensive and 49 percent became cheaper

Milton Friedman, who won the Nobel Prize in Economics, characterized inflation as being "high and variable." These characteristics of inflation create problems because

In Bovania, cattle compose 48 percent of the consumer price index CPI), housing composes 32 percent, and entertainment accounts for the remaining 20 percent. If, in a certain year, the price of cattle rises by 30 percent and the price of housing rises by 25 percent, then

The concept of a price index is that it is an)

Three accuracy problems with the consumer price index CPI) are

Deflation

Explain why in industry it is important for both employers and workers to have an accurate measure of inflation.

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