Deck 29: Saving, Investment, and the Financial System

Question 1

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 Indexes (PPI)

Answer 1

B

Question 2

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

Answer 2

C

Question 3

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) None of the answers is correct.

Answer 3

B

Question 4

Reference: Ref 12-1 (Table: Consumer Price Index) Refer to the CPI values in the table for the years 2005 to 2010. In which years did the country experience deflation? I. 2007 II. 2008 III. 2009 IV. 2010

A) I, II, and III only
B) I only
C) I and III only
D) III only

Question 5

Reference: Ref 12-1 (Table: Consumer Price Index) Refer to the CPI values in the table for the years 2005 to 2010. In which years did the country experience disinflation? I. 2006 II. 2007 III. 2008 IV. 2009

A) I and II only
B) I and III only
C) II and III only
D) II and IV only

Question 6

Reference: Ref 12-1 (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 percent
B) 21.53 percent
C) 3.85 percent
D) 3.72 percent

Question 7

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 8

Reference: Ref 12-1 (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 percent
B) 18.10 percent
C) 21.81 percent
D) 1.68 percent

Question 9

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

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

Question 10

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

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

Question 11

Inflation is an increase in the

A) prices of some goods and services.
B) prices of a few important goods and services.
C) prices of all goods and services in general.
D) price of financial intermediation.

Question 12

Suppose a nation's inflation rate is 5.8 percent 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 13

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

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

Question 14

Which price index measures prices of intermediate and final goods?

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

Question 15

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) Each price index accomplishes the same task.

Question 16

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 percent
B) 110 percent
C) 10 percent
D) 9 percent

Question 17

Reference: Ref 12-1 (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 18

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

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

Question 19

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 20

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

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

Question 21

According to the quantity theory of money, an increase in the money supply causes an increase in

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

Question 22

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 23

The quantity theory of money describes the relationship between

A) prices, employment, money, and production.
B) money velocity, money, real output, and prices.
C) GDP, money, consumption, and savings.
D) None of the answers is correct.

Question 24

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 25

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

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

Question 26

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) Consumers have switched to substitute items.
C) Certain technological advances have offset scarcity.
D) Production costs have increased.

Question 27

Source: International Monetary Fund (www.imf.org) Reference: Ref 12-2 (Table: Polish Inflation) This table shows actual inflation data for different periods of Polish history. Which year can you identify as hyperinflationary?

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

Question 28

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

A) 13.9 percent.
B) 11.2 percent.
C) 6.3 percent.
D) 3.9 percent.

Question 29

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 30

The common price indexes for measuring inflation include the I. consumer price index. II. GDP deflator. III. commodity price index.

A) I and II only
B) II and III only
C) I and III only
D) I, II, and III

Question 31

If the price of gasoline increased 100 percent during a period of time when inflation was 100 percent, then the 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 32

Which price index measures the average price received by producers?

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

Question 33

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 price level is 2. What is the velocity of money?

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

Question 34

Source: International Monetary Fund (www.imf.org) Reference: Ref 12-2 (Table: Polish Inflation) This table shows actual inflation data for different periods of Polish history. Which year can you identify as deflationary?

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

Question 35

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

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 36

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 37

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 38

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

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

Question 39

What would explain the fact that food costs less now than it did in the early 1980s?

A) Real prices decreased.
B) GDP per capita increased.
C) The PPI decreased.
D) The CPI decreased.

Question 40

Which of the following measures of inflation is based on a fixed 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 41

According to the quantity theory of money, the major cause of inflation in the long run is an increase in

A) the standard of living.
B) the velocity of money.
C) the growth of real GDP.
D) the growth of the money supply.

Question 42

Suppose the money supply equals $100 million, the 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 43

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

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 44

The quantity theory of money is a theory of

A) money growth in the United States.
B) inflation.
C) economic growth.
D) the growth of tax burdens.

Question 45

Reference: Ref 12-3 (Table: CPI) According to the table, in which of the following years did this country experience disinflation?

A) 1999
B) 2000
C) 2001
D) 2002

Question 46

According to the quantity theory of money, an increase in the money supply will cause the price level to

A) remain relatively constant since money is neutral.
B) increase by the same percentage as the money supply.
C) increase by a greater percentage than the money supply.
D) increase by a smaller percentage than the money supply.

Question 47

If, in an economic panic people decide to hold their money rather than spend it, the velocity of money will

A) remain relatively constant.
B) increase.
C) decrease.
D) become unpredictable.

Question 48

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 49

When we examine data from different countries, higher money growth has consistently been associated with

A) deflation.
B) disinflation.
C) hyperinflation.
D) higher inflation.

Question 50

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

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

Question 51

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.

Question 52

Reference: Ref 12-3 (Table: CPI) According to the table, in which of the following years did this country experience deflation?

A) 1999
B) 2000
C) 2001
D) 2002

Question 53

All else equal, an increase in the velocity of money will cause

A) deflation.
B) disinflation.
C) hyperinflation.
D) higher inflation.

Question 54

What causes the price level to decrease?

A) The population spends less money.
B) The population spends money faster.
C) The population becomes more productive.
D) The government spends more.

Question 55

According to the quantity theory of money, a nation that increases its money supply by 30 percent should expect its price level to increase by approximately

A) 15 percent.
B) 30 percent.
C) 45 percent.
D) 60 percent.

Question 56

In a small economy, the money supply is $400,000, and the velocity of money is 3. The current 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 57

Why could very high rates of inflation cause velocity to increase?

A) The more that people earn, the faster they spend it.
B) People try to spend their money before it loses too much value.
C) The more that people spend, the faster prices rise.
D) None of the answers is correct.

Question 58

In the long run, money

A) always increases GDP.
B) will not affect prices.
C) will lift the standard of living for everyone in a nation.
D) is neutral.

Question 59

In the quantity theory of money, the growth of ________ is the cause of inflation.

A) the money supply
B) velocity
C) real GDP
D) the CPI

Question 60

The velocity of money is

A) how fast the price level is rising.
B) how fast the inflation rate is rising.
C) the average number of times a dollar is spent on consumer goods and services.
D) the average number of times a dollar is spent on final goods and services.

Question 61

Which of the following is an example of money illusion assuming that inflation is 5 percent?

A) You receive a 5 percent raise on your part-time job and start spending extra money on entertainment every weekend.
B) You receive a 5 percent raise on your part-time job, but do not increase or decrease your spending.
C) You do not receive a raise on your part-time job, but cut out some expenses as you notice some prices rising.
D) None of the answers is correct.

Question 62

High volatility in the inflation rate can result in

A) improper allocation of resources.
B) sudden changes in prices.
C) volatility in the CPI.
D) deflation.

Question 63

Which of these statements is correct? I. If your nominal wages rise at a rate higher than the inflation rate, you have received a "real" pay raise. II. If your nominal wages rise at exactly the rate of inflation, your purchasing power over time remains constant. III. If your nominal wages rise at 4 percent while inflation rises at 5 percent, you have essentially received a "pay cut."

A) I and II only
B) I and III only
C) II and III only
D) I, II, and III

Question 64

How might changes in the money supply be non-neutral in the short run?

A) As the amount of money circulating in the economy changes before prices respond, consumers' purchases change accordingly, which leads producers to change production levels.
B) When money supply changes in the short run, it will affect nominal, but not real, variables in the short run.
C) As money growth increases at a faster rate, it will cause real GDP to grow at an equally faster rate.
D) If producers expect inflation to increase, they will increase supply in order to sell before the arrival of inflation.

Question 65

When changes in nominal prices are confused with changes in real prices, people experience

A) consumer bias.
B) inflationary delusion.
C) cyclical price confusion.
D) money illusion.

Question 66

The costs of inflation include I. wasted resources in association with price confusion. II. higher tax burdens. III. wealth redistribution from private citizens to the government.

A) I and II only
B) II and III only
C) I and III only
D) I, II, and III

Question 67

The argument that "inflation is always and everywhere a monetary phenomenon" is consistent with

A) the theory of price confusion.
B) the quantity theory of money.
C) the theory of money illusion.
D) the Fisher effect.

Question 68

The books "inflation parable" refers to the fact that an unexpected change in the money supply affects

A) real GDP only in the long run.
B) real GDP only in the short run.
C) real GDP in both the short run and the long run.
D) only inflation in the short run.

Question 69

Mistaking changes in nominal prices for changes in real prices is called

A) price.
B) inflation.
C) money.
D) wealth.

Question 70

Lonnie lends Burt $15,000 in 2009. Burt's repaid Lonnie $150 in real interest for the one-year loan. Inflation that year was 1.5 percent. What nominal interest rate did Lonnie charge Burt?

A) 0.5 percent
B) 2 percent
C) 2.5 percent
D) -0.5 percent

Question 71

Reference: Ref 12-4 (Table: Anticipating Inflation) Using the inflation data in the table above, assume that all loan contracts had fixed nominal interest rates of 10 percent and matured after one year. In which year did lenders receive exactly the amount of real interest they expected?

A) 2000
B) 2002
C) 2003
D) 2004

Question 72

Jordan lent Taylor $1,200 on March 15, 2009. Taylor returned $1,260 on March 14, 2010. Inflation was 2 percent over the one-year period. What is the real interest rate that Taylor paid?

A) 2 percent
B) 3 percent
C) 5 percent
D) 7 percent

Question 73

When people suffer from money illusion, an increase in the money supply

A) raises real GDP in the short run.
B) lowers real GDP in the short run.
C) has no effect on real GDP in the short run but raises real GDP in the long run.
D) lowers real GDP in the long run.

Question 74

Because of the money illusion, inflation usually confuses

A) consumers.
B) workers.
C) firms.
D) Each of these groups of people.

Question 75

Money illusion occurs when people

A) correctly see changes in nominal prices.
B) correctly see changes in real prices.
C) see changes in real prices and mistake them for changes in nominal prices.
D) see changes in nominal prices and mistake them for changes in real prices.

Question 76

When the money supply and the demand for goods increase at the same time:

A) producers understand how to react, but consumers are confused.
B) consumers act rationally, but producers cannot read the market signals.
C) the government is able to clarify how the markets will be affected.
D) both consumers and producers can often become confused.

Question 77

Between 2008 and 2009, there was

A) deflation.
B) hyperinflation.
C) disinflation.
D) inflation in the real price of everything.

Question 78

Reference: Ref 12-4 (Table: Anticipating Inflation) Using the inflation data in the table above, assume that all loan contracts had fixed nominal interest rates of 10 percent and matured after one year. In which year given below did lenders gain relative to borrowers?

A) 2000
B) 2002
C) 2003
D) 2004

Question 79

The concept of money illusion refers to

A) people who do not understand the purchasing power of money and therefore spend it faster than they can earn it.
B) consumers with inflation-indexed wages seeing a rise in prices and believing that their purchasing power has been compromised.
C) consumers paying prices that are higher than normal and not feeling bad about it because it's happening to everyone just the same.
D) an unobserved change in relative prices.

Question 80

The argument that "money is neutral in the long run" means that an increase in the money supply can

A) increase real GDP only temporarily.
B) decrease real GDP only temporarily.
C) increase real GDP permanently.
D) decrease real GDP permanently.