Deck 12: Inflation and the Quantity Theory of Money

Question 1

If the average price level rises from 120 in year 1 to 130 in year 2, the inflation rate between years 1 and 2 will be:

A) 7.69%.
B) 8.33%.
C) 9.23%.
D) 10%.

Answer 1

8.33%.

Question 2

The basket of goods bought by the average consumer:

A) stays about the same throughout time.
B) is changing all the time.
C) uniformly falls in price.
D) uniformly rises in price.

Answer 2

is changing all the time.

Question 3

From 2003 to 2013, the United States experienced average annual inflation of about:

A) 0.24%.
B) 2.4%.
C) 24%.
D) 240%.

Answer 3

2.4%.

Question 4

Inflation is an increase in the:

A) value of the dollar.
B) value of the New York Stock Exchange.
C) average level of prices.
D) level of nominal output.

Question 5

Inflation refers to an increase in the:

A) relative prices of some goods as compared to other goods.
B) average level of prices.
C) standard of living.
D) average level of nominal output.

Question 6

The consumer price index measures the prices of:

A) all final goods bought by American consumers.
B) a basket of goods bought by a typical American consumer.
C) intermediate as well as final goods.
D) introductory, intermediate, and final goods.

Question 7

The price level at the end of 2011 minus the price level at the end of 2010 is the _____ for the year 2011.

A) inflation rate
B) change in the price level
C) change in gross national product
D) consumer price index

Question 8

The ratio of nominal economic output to real economic output multiplied by 100 is the:

A) consumer price index.
B) GDP deflator.
C) producer price index.
D) exchange rate.

Question 9

A real price is:

A) an increase in the average level of the price of a good.
B) a decrease in the average level of the price of a good.
C) a price that has been corrected for inflation.
D) the average number of times a dollar is spent on final goods and services in a year.

Question 10

When the government of Zimbabwe ran out of money, President Robert Mugabe:

A) raised taxes.
B) printed more money.
C) slashed spending.
D) collapsed.

Question 11

When computing the consumer price index, the Bureau of Labor Statistics takes into account changes in the:

A) type of goods but not the quality of goods purchased by the average consumer.
B) quality of goods but not the type of goods purchased by the average consumer.
C) type of goods and the quality of goods.
D) neither the price nor the quality of the goods.

Question 12

As a result of the changing variety and quality of goods that the typical consumer purchases each year, many economists argue that the CPI might:

A) have to be abandoned in favor of a better measure of inflation.
B) not be as good a measure of inflation as the GDP deflator is.
C) understate inflation.
D) overstate inflation.

Question 13

Which measure of the average price level most closely corresponds to a student's daily economic activities?

A) consumer price index
B) producer price index
C) GDP deflator
D) household price index

Question 14

Which measure of prices includes all of the final goods and services in a nation's output?

A) consumer price index
B) the GDP deflator
C) producer price index
D) the exchange rate

Question 15

The inflation rate is the rate of change of the:

A) value of the dollar.
B) New York Stock Exchange.
C) average level of prices.
D) money supply.

Question 16

If the price level in 2018 is 150 and it rises to 165 in 2019, what is the rate of inflation between 2018 and 2019?

A) 9%
B) 10%
C) 15%
D) 165%

Question 17

The average price for a basket of goods bought by a typical U.S. consumer is measured by the:

A) consumer price index.
B) GDP deflator.
C) producer price index.
D) exchange rate.

Question 18

Inflation is:

A) the average number of times a dollar is spent on final goods and services in a year.
B) when people mistake changes in nominal prices for changes in real prices.
C) a decrease in the average level of prices.
D) an increase in the average level of prices.

Question 19

If the price level in 2016 is 140 and it falls to 133 in 2017, what has the economy experienced between 2016 and 2017?

A) 5% inflation
B) 7% inflation
C) 7% deflation
D) 5% deflation

Question 20

A measure of the average price received by suppliers is the:

A) consumer price index.
B) GDP deflator.
C) producer price index.
D) exchange rate.

Question 21

Suppose a nation's inflation rate is 5.8% from Year 1 to Year 2. If the CPI in Year 2 is 200, what was the CPI in Year 1?

A) 180
B) 189
C) 190
D) 208

Question 22

Use the following to answer questions: Table: Consumer Price Index $$\begin{array} { l c } \hline \text { Year } & \begin{array} { l } \text { CPI } \\\text { (End-of-Yea } \\\text { r Value) }\end{array} \\\hline 2005 & 195.3 \\2006 & 201.6 \\2007 & 207.3 \\2008 & 215.3 \\2009 & 214.5 \\2010 & 218.1 \\\hline\end{array}$$

-(Table: Consumer Price Index) Refer to the CPI values in the table for the years 2005 to 2010. What was the approximate inflation rate over the period 2007 to 2008?

A) 8.00%
B) 21.53%
C) 3.86%
D) 3.72%

Question 23

Use the following to answer questions: Table: Consumer Price Index $$\begin{array} { l c } \hline \text { Year } & \begin{array} { l } \text { CPI } \\\text { (End-of-Yea } \\\text { r Value) }\end{array} \\\hline 2005 & 195.3 \\2006 & 201.6 \\2007 & 207.3 \\2008 & 215.3 \\2009 & 214.5 \\2010 & 218.1 \\\hline\end{array}$$

-(Table: Consumer Price Index) Refer to the CPI values in the table for the years 2005 to 2010. In which year(s) did the country experience deflation?

A) 2007 only
B) 2009 only
C) both 2007 and 2009
D) neither 2007 nor 2009

Question 24

Use the following to answer questions: Table: Consumer Price Index $$\begin{array} { l c } \hline \text { Year } & \begin{array} { l } \text { CPI } \\\text { (End-of-Yea } \\\text { r Value) }\end{array} \\\hline 2005 & 195.3 \\2006 & 201.6 \\2007 & 207.3 \\2008 & 215.3 \\2009 & 214.5 \\2010 & 218.1 \\\hline\end{array}$$

-(Table: Consumer Price Index) Refer to the CPI values in the table for the years 2005 to 2010. What was the approximate inflation rate over the period 2009 to 2010?

A) 3.60%
B) 18.10%
C) 21.81%
D) 1.68%

Question 25

Which of the following is NOT a price index often used to measure inflation?

A) consumer price index
B) producer price index
C) net price index
D) GDP deflator

Question 26

Which of the following is NOT a price index used by economists to measure inflation?

A) Consumer Price Index (CPI)
B) Commodity Consumption Indicator (CCI)
C) GDP deflator
D) Producer Price Index (PPI)

Question 27

What do we call an increase in the average level of prices in an economy?

A) recession
B) disinflation
C) deflation
D) inflation

Question 28

Approximately how many prices of goods and services are measured by the CPI?

A) 800,000
B) 80,000
C) 800
D) 80

Question 29

The consumer price index measures the:

A) total price of a basket of goods and services bought by a typical consumer.
B) average price of a basket of goods and services bought by a typical consumer.
C) total price of a basket of goods and services bought by all families in the country.
D) average price of a basket of goods and services bought by all families in the country.

Question 30

Which of the three price indexes measures the average price level of the largest total number of goods?

A) the consumer price index
B) the GDP deflator
C) the producer price index
D) wholesale price index

Question 31

Use the following to answer questions: Table: Consumer Price Index $$\begin{array} { l c } \hline \text { Year } & \begin{array} { l } \text { CPI } \\\text { (End-of-Yea } \\\text { r Value) }\end{array} \\\hline 2005 & 195.3 \\2006 & 201.6 \\2007 & 207.3 \\2008 & 215.3 \\2009 & 214.5 \\2010 & 218.1 \\\hline\end{array}$$

-(Table: Consumer Price Index) Refer to the CPI values in the table for the years 2005 to 2010. In which year was the inflation rate the highest?

A) 2006
B) 2007
C) 2008
D) 2009

Question 32

The percentage increase in a price index from one year to the next is the:

A) real GDP growth rate.
B) inflation rate.
C) GDP inflator.
D) nominal GDP growth rate.

Question 33

If the price level in the year 2000 is 100, and the price level in the year 2001 is 110, what is the inflation rate in 2001?

A) 100%
B) 110%
C) 10%
D) 9%

Question 34

Which price index measures prices of both intermediate and final goods?

A) Consumer Price Index (CPI)
B) Producer Price Index (PPI)
C) GDP inflator
D) GDP deflator

Question 35

Which of the following statements highlights the difference between the CPI (consumer price index) and the GDP deflator?

A) The CPI measures the average prices of inputs in the production process, whereas the GDP deflator measures the average prices of goods and services purchased by consumers.
B) The CPI measures the average prices of retail goods and services, whereas the GDP deflator measures the average prices of wholesale goods.
C) The CPI measures the average prices of goods and services consumed by typical consumers, whereas the GDP deflator measures the average prices of all goods and services in the economy.
D) The CPI measures the average prices of all final goods and services purchased by consumers, whereas the GDP deflator measures the average prices of all inputs used in the economy.

Question 36

Suppose a nation's CPI is 150 in Year 1 and 180 in Year 2. What is the rate of inflation?

A) 17%
B) 15%
C) 20%
D) 25%

Question 37

Which index measures price increases that typical American consumers face when shopping?

A) CPI
B) PPI
C) GDP deflator
D) GDP inflator

Question 38

Inflation is best defined as an increase in:

A) the real price of a good or service.
B) the price of one product relative to the price of another product.
C) all prices in an economy.
D) the average price level.

Question 39

Use the following to answer questions: Table: Consumer Price Index $$\begin{array} { l c } \hline \text { Year } & \begin{array} { l } \text { CPI } \\\text { (End-of-Yea } \\\text { r Value) }\end{array} \\\hline 2005 & 195.3 \\2006 & 201.6 \\2007 & 207.3 \\2008 & 215.3 \\2009 & 214.5 \\2010 & 218.1 \\\hline\end{array}$$

-(Table: Consumer Price Index) Refer to the CPI values in the table for the years 2005 to 2010. In which year(s) did the country experience disinflation?

A) 2007 only
B) 2009 only
C) both 2007 and 2009
D) neither 2007 nor 2009

Question 40

If a price index increased from 400 to 440 over the course of a year, then the inflation rate is:

A) 4%.
B) 9%.
C) 10%.
D) 40%.

Question 41

If the inflation rate falls from 4% in 2005 to 2% in 2006, then:

A) disinflation has occurred.
B) deflation has occurred.
C) the average price level has declined.
D) the value of money has increased.

Question 42

Which price index comprises the prices of all final goods and services produced within the economy?

A) the consumer price index
B) the GDP inflator
C) the GDP deflator
D) the producer price index

Question 43

The GDP deflator:

A) measures the average price for a basket of goods bought by an average consumer.
B) measures the average price received by producers.
C) measures the average price of all final goods and services produced.
D) is the price index adjusted with changes in GDP.

Question 44

Which price index measures the average price received by suppliers?

A) the consumer price index
B) the GDP deflator
C) the producer price index
D) the wholesale price index

Question 45

The GDP deflator:

A) measures the average price for a basket of goods bought by an average consumer.
B) measures the average price received by producers.
C) is the ratio of nominal GDP to real GDP multiplied by 100.
D) is the price index associated with changes in the cost of living to consumers.

Question 46

Why do we use the "real" prices of goods to measure how expensive things have become?

A) to find out what the current prices of goods and services are
B) to estimate the periods when hyperinflation has occurred
C) to find out what the inflation rate has been
D) to see whether there have been any changes in our purchasing power

Question 47

A real price is the price:

A) that consumers really pay.
B) after adjusting for any discounts.
C) after adding any additional finance charges.
D) that has been corrected for inflation.

Question 48

To compare the $1-an-hour your grandfather earned in 1950 with the $8-an-hour you earn today, you would need to:

A) simply compare $1-an-hour to $8-an-hour.
B) add the inflation rates in each year since 1950 until today and add this to your grandfather's wage.
C) calculate real wages in both 1950 and today.
D) calculate your grandfather's nominal wage in 1950 and compare it to your wage today.

Question 49

Which answer best explains why prices of some popular goods have fallen over time?

A) Consumers have increased their demand for these products over time.
B) Consumer demand has become more inelastic.
C) Technological advances have reduced production costs.
D) Supply of the good has decreased.

Question 50

Which of the following measures of inflation is based on a basket of goods and services for a typical household?

A) the index of household expenditures
B) the producer price index
C) the GDP deflator
D) the consumer price index

Question 51

From 2002 to 2007, Zimbabwe experienced average annual inflation of:

A) 0%.
B) 3%.
C) 20%.
D) 736%.

Question 52

Which price index measures the average price for a basket of goods purchased by a typical American consumer?

A) the consumer price index
B) the household price index
C) the GDP deflator
D) the producer price index

Question 53

If the CPI was 125 last year and is now 135, then the inflation rate last year was:

A) 6%.
B) 7%.
C) 8%.
D) 10%.

Question 54

If you earned $10-an-hour in 2005 when the CPI was 100, and you earn $11-an-hour today when the CPI is 120, then your real wage rate has _____ since 2005.

A) increased 20%
B) remained the same
C) decreased
D) increased 10%

Question 55

Two of the challenging factors faced by the BLS when computing the consumer price index are:

A) new goods and better-quality goods.
B) new goods and inferior goods.
C) used goods and better-quality goods.
D) used goods and inferior goods.

Question 56

Use the following to answer questions: Table: Inflation in Poland $$\begin{array} { l c } \hline \text { Year } & \text { Inflation Rate (Annual \% Change) } \\\hline 1985 & 15.1 \% \\1990 & 585.8 \% \\1999 & 7.3 \% \\2002 & 1.9 \% \\2003 & 0.8 \% \\\hline\end{array}$$ Source: International Monetary Fund (www.imf.org)

-(Table: Inflation in Poland) This table shows actual inflation data for different periods in Poland. Which year was hyperinflationary?

A) 1985
B) 1990
C) 1999
D) 2003

Question 57

The consumer price index measures the:

A) average price of all goods and services included in GDP.
B) average price received by producers.
C) cost of living for a typical consumer.
D) price of the most popular household item.

Question 58

The average rate of inflation in the United States over the past 10 years has been around 2.4%. If this trend continues, prices in the United States will double in about _____ years.

A) 10
B) 18
C) 29
D) 39

Question 59

If you had to predict the U.S. inflation rate for next year and decided that a good way to make that prediction would be to simply use the average inflation rate over the past 10 years, what would be your prediction for U.S. inflation next year?

A) 1.1%
B) 2.4%
C) 4.0%
D) 5.2%

Question 60

If the CPI was 100 in 2000 and 120 in 2010 and the price of a gallon of milk was $4.00 in 2000 and $4.80 in 2010, then in relative terms the real of price milk between 2000 and 2010:

A) increased by 20%.
B) decreased by 20%.
C) remained the same.
D) cannot be determined without knowing the base year.

Question 61

Compared to other countries, inflation in the United States has been:

A) about the same.
B) relatively high.
C) relatively low.
D) extremely unpredictable.

Question 62

If the price of gasoline increased 100% during a period of time when inflation was 100%, then the relative real price of gasoline would:

A) increase.
B) decrease.
C) remain constant.
D) increase or decrease, depending on whether income had changed or not.

Question 63

The average number of times a dollar is spent on final goods and services during a year is the:

A) velocity of money.
B) money supply.
C) consumption rate.
D) quantity theory of money.

Question 64

In a small economy, the rate of money growth for the current year is 2%. Velocity of money circulation is stable. Inflation is expected to be about 1.5% over the current year. What is the short-run economic growth rate?

A) 3.5%
B) 1.5%
C) 0.5%
D) 2%

Question 65

When the price of a good in Russia increases from 20 rubles to 20 million rubles in a single year, the nation is experiencing:

A) deflation.
B) falling GDP per capita.
C) hyperinflation.
D) high disinflation.

Question 66

According to the quantity theory of money, an increase in the money supply causes an increase in _____ over the long run.

A) production
B) the velocity of money
C) real GDP
D) prices

Question 67

According to the CPI, since 1950 the average U.S. inflation rate has been:

A) 13.9%.
B) 11.2%.
C) 6.3%.
D) 3.3%.

Question 68

What two components of the quantity theory of money are assumed to be stable over time?

A) the velocity of money and the price level
B) real GDP and price level
C) real GDP and the velocity of money
D) the money supply and the velocity of money

Question 69

The velocity of money is:

A) how fast the price level is rising.
B) how fast the inflation rate is rising.
C) the rate at which money can be printed.
D) the average number of times a dollar is spent on final goods and services.

Question 70

An assumption of the quantity theory of money is that real GDP growth:

A) remains relatively constant.
B) rises with increases in the money supply.
C) rises with increases in the velocity of money.
D) rises with increases in the price level.

Question 71

Hyperinflation refers to the case in which inflation:

A) remains relatively constant.
B) is extremely high.
C) is extremely low.
D) is extremely unpredictable.

Question 72

Use the following to answer questions: Table: Inflation in Poland $$\begin{array} { l c } \hline \text { Year } & \text { Inflation Rate (Annual \% Change) } \\\hline 1985 & 15.1 \% \\1990 & 585.8 \% \\1999 & 7.3 \% \\2002 & 1.9 \% \\2003 & 0.8 \% \\\hline\end{array}$$ Source: International Monetary Fund (www.imf.org)

-(Table: Inflation in Poland) This table shows actual inflation data for different periods in Poland. Which year was deflationary?

A) 1990
B) 1999
C) 2003
D) No year was deflationary.

Question 73

What is the best explanation for the fact that the dollars spent on food has risen since the early 1980s but that food costs less now than it did then?

A) Real food prices decreased over the period.
B) Available food per capita decreased over the period.
C) The PPI decreased over the period.
D) The CPI decreased over the period.

Question 74

What country had the highest inflation rate from 2002-2007?

A) Angola
B) China
C) Japan
D) Zimbabwe

Question 75

Suppose the money supply equals $100 million, the average price level equals 40, and real GDP equals $50 million. Given this information, the velocity of money equals:

A)20.
B)80.
C)100.
D)125.

Question 76

In a small economy, the money supply is $400,000, and the velocity of money is 3. The current average price level in the economy is 1. What is the level of real GDP in this economy?

A) $1.2 million
B) $1.6 million
C) $400,000
D) $133,333

Question 77

The "quantity theory of money" describes the relationship between:

A) prices, employment, money supply, and production.
B) the velocity of money, money supply, real output, and prices.
C) GDP, money supply, consumption, and savings.
D) the money supply and real GDP.

Question 78

An assumption of the quantity theory of money is that the velocity of money:

A) remains relatively constant.
B) rises with increases in the money supply.
C) rises with increases in real GDP.
D) rises with increases in the price level.

Question 79

In a small economy, the quantity of money circulating in the economy is $2.5 million. Real GDP for the current year is $5 million, and the average price level is 2. What is the velocity of money?

A) 4
B) 2
C) 2.5
D) 5

Question 80

If the velocity of money and real GDP are fixed, then the quantity theory of money implies that the price level will:

A) increase at a lower rate than the growth in the money supply.
B) increase at the same rate as the growth in the money supply.
C) increase at a higher rate than the growth in the money supply.
D) be unrelated to the growth in the money supply.