Deck 13: Inflation and unemployment

Question 1

Consider an economy with only two goods: bread and wine.In 1982,the typical family bought four loaves of bread at 50¢ per loaf and two bottles of wine for $9 per bottle.In 2002,bread cost 75¢ per loaf and wine cost $10 per bottle.The CPI for 2002 (using a 1982 base year)is:

A)100.
B)115.
C)126.
D)130.

Answer 1

B

Question 2

As the price of petrol rose during the 1970s,consumers cut back on their use of petrol relative to other consumer goods.This situation contributed to which bias in the consumer price index?

A)Substitution bias.
B)Transportation bias.
C)Quality bias.
D)Indexing bias.

Answer 2

A

Question 3

The CPI is called a fixed-weight price index because:

A)people do not change their purchasing preferences over time.
B)the composition of the market basket changes from one period to the next.
C)the composition of the market basket remains unchanged from one period to the next.
D)the CPI does not change over time.

Answer 3

C

Question 4

Suppose a market basket of goods and services costs $400 in the base year and the consumer price index (CPI)is currently 125.This indicates the price of the market basket of goods is now:

A)$275.
B)$425.
C)$500.
D)$525.

Question 5

One way the consumer price index (CPI)differs from the GDP chain price index is that the CPI:

A)uses current-year quantities of goods and services.
B)includes separate market baskets of goods and services for both base and current years.
C)includes only goods and services bought by typical urban consumers.
D)is bias-free.

Question 6

Price indexes like the CPI are calculated using a base year.The term 'base year' refers to:

A)the first year that price data are available.
B)any year in which inflation was higher than 5 per cent.
C)the most recent year in which the business cycle hit the trough.
D)an arbitrarily chosen reference year.
E)the year in which inflation was at its minimum.

Question 7

The consumer price index is also called:

A)the price of living index.
B)the cost of surviving index.
C)the cost of living index.
D)the price of underemployment.

Question 8

During the 1970s,inflation in Australia:

A)reached its lowest rate (0.2 per cent) since the end of the Second World War.
B)approached hyperinflation proportions.
C)declined to 0.5 per cent as a result of the first oil price shock.
D)reached a peak of 16 per cent in 1976, then subsided during the 1980s.

Question 9

Deflation is defined as a decrease in:

A)the real wages of workers.
B)real GDP compared with the CPI.
C)the average price level of goods and services in the economy.
D)the price of all consumer products.

Question 10

One way the consumer price index (CPI)differs from the GDP chain price index is that it:

A)is based on all final goods and services.
B)uses only current-year quantities.
C)includes preferences of all consumers.
D)includes services.
E)includes purchases of items bought by typical urban consumers.

Question 11

The spending patterns over the last 50 to 60 years:

A)are the same.
B)have changed significantly.
C)have decreased.
D)have increased.

Question 12

The problem with measuring inflation using the CPI is:

A)that inflation may be understated for people who buy mainly goods and services whose prices are stable.
B)that inflation may be overstated for people who buy mainly goods and services whose prices are rising faster than the average.
C)that the CPI has difficulty in accounting for changes in the prices of goods and services.
D)that the CPI uses a fixed basket of goods and services, and so cannot allow for people substituting towards cheaper goods and services.

Question 13

Since the recession in the early 1990s,inflation in Australia has been:

A)volatile.
B)low and stable.
C)high but stable.
D)zero.
E)steadily rising.

Question 14

If the consumer price index (CPI)in 2001 was 200 and the CPI in 2002 was 215,the rate of inflation was:

A)215 per cent.
B)15 per cent.
C)5 per cent.
D)7.5 per cent.
E)8 per cent.

Question 15

Inflation in Australia since the early 1990s has been:

A)higher than at any time since the 1960s.
B)more volatile than in the 1970s.
C)lower than at any time since the 1960s.
D)higher than it was in the 1980s.

Question 16

Deflation means a decrease in:

A)the rate of inflation.
B)the prices of all products in the economy.
C)homes, cars and basic resources.
D)the general level of prices in the economy.

Question 17

The consumer price index (CPI)compares the prices of:

A)all goods and services in the economy compared to the prices of those goods and services in a base year.
B)consumer goods and services that a household purchases to the prices of those goods and services purchased in a base year.
C)producer goods and services that are made for consumers to the prices of those goods and services in a base year.
D)goods and services that are purchased by producers to the prices of those goods and services in a base year.
E)goods and services that are purchased by consumer manufacturers to the prices of those goods and services in a base year.

Question 18

Suppose the consumer price index (CPI)stands at 250 this year.If the inflation rate is 10 per cent,then next year's CPI will equal:

A)250.
B)260.
C)275.
D)500.

Question 19

Which of the following would understate the consumer price index?

A)Substitution bias.
B)Deteriorating quality of products.
C)Improving quality of products.
D)Law of demand bias.

Question 20

An increase in the average price level of goods and services is called:

A)deflation.
B)disinflation.
C)inflation.
D)cost-push deflation.

Question 21

If the rate of inflation in a given time period turns out to be higher than lenders and borrowers anticipated,then the effect will be:

A)a redistribution of wealth from borrowers to lenders.
B)a net gain in purchasing power for lenders relative to borrowers.
C)no change in the distribution of wealth between lenders and borrowers.
D)that the borrow will be a winner.

Question 22

Suppose your nominal income this year is 5 per cent higher than last year.If the inflation rate for the period was 3 per cent,then your real income:

A)increased by 1.67 per cent.
B)increased by 2 per cent.
C)increased by 8 per cent.
D)declined by 0.6 per cent.

Question 23

The CPI (using a 1982 base year)for 1951 is 26.Suppose a household's annual take home pay in 1951 was $8320.What would be an equivalent home pay in 1982?

A)$10 483.
B)$21 632.
C)$23 680.
D)$32 000.

Question 24

Suppose the inflation rate is 10 per cent and that you deposit $10 000 in the bank that yields 8 per cent nominal interest rate.Your real interest rate is:

A)0%
B)2%
C)-2%
D)8%

Question 25

The CPI is used to determine:

A)how higher quality products increase the wellbeing of consumers.
B)how the cost of living changed from one period to another.
C)the changes in prices of all consumer goods and services.
D)how changing prices affect the export of goods and services.

Question 26

The CPI is called:

A)a variable price of living index.
B)a price of living index.
C)a fixed-cost index.
D)a variable-price index.
E)a fixed-weight price index.

Question 27

Exhibit 13-1 Consumer price index

As shown in Exhibit 13-1,the rate of inflation for Year 4 is:

A)5 per cent.
B)10 per cent.
C)19 per cent.
D)20 per cent.
E)25 per cent.

Question 28

When the inflation rate rises,the purchasing power of nominal income:

A)remains unchanged.
B)decreases.
C)increases.
D)changes by the inflation rate minus one.

Question 29

Which of the following is correct?

A)People whose nominal incomes rise slower than the rate of inflation gain purchasing power.
B)Real income equals nominal income multiplied by the CPI as a decimal.
C)The percentage change in real income equals the percentage change in nominal income plus the percentage change in CPI.
D)The actual number of dollars received is called a nominal income.

Question 30

A person pays cash for a house in 1990 for $100 000 and sells it in 2000 for $150 000.Over the same period the CPI has risen from its base index to 200.In terms of this asset,the purchasing power of this person:

A)has increased.
B)has decreased.
C)has remained unchanged.
D)is indeterminate.

Question 31

Exhibit 13-1 Consumer price index

As shown in Exhibit 13-1,the rate of inflation for Year 2 is:

A)5 per cent.
B)10 per cent.
C)20 per cent.
D)25 per cent.

Question 32

Suppose you deposit $10 000 in a bank that yields a nominal interest rate of 8 per cent.If you expect inflation to be 6 per cent or lower,then you are expecting to earn a real interest rate of at least:

A)1.6 per cent.
B)2 per cent.
C)4 per cent.
D)5 per cent.

Question 33

Assume that the real rate of interest is 5 per cent and a lender charges a nominal interest rate of 15 per cent.If a borrower expects that the rate of inflation next year will be 10 per cent and the actual rate of inflation next year is 12 per cent:

A)neither the borrower nor the lender benefits from inflation.
B)both the borrower and the lender lose from inflation.
C)the borrower benefits from inflation, while the lender loses from inflation.
D)the lender benefits from inflation, while the borrower loses from inflation.
E)it is not possible to determine who gains or loses.

Question 34

When inflation is relatively high and unstable,firms tend to invest more in _____ and less in _____.

A)productive assets; real estate
B)shares; real estate
C)real estate; productive assets
D)real estate; consumption

Question 35

The real interest rate is defined as the:

A)actual interest rate.
B)fixed rate on consumer loans.
C)nominal interest rate minus the inflation rate.
D)expected interest rate minus the inflation rate.
E)maximum interest rate.

Question 36

Consider borrowers and lenders who agree to loans with fixed nominal interest rates.If inflation is higher than what the borrowers and lenders expected,then who benefits from lower real interest rates?

A)Only the borrowers benefit.
B)Only the lenders benefit.
C)Both borrowers and lenders benefit.
D)Neither borrowers nor lenders benefit.

Question 37

Last year the Jones family earned $40 000.This year their income is $42 000.In an economy with an inflation rate of 10 per cent,which of the following is correct?

A)The Jones' nominal income and real income have both fallen.
B)The Jones' nominal income and real income have both risen.
C)The Jones' nominal income has increased and their real income has fallen.
D)The Jones' nominal income has decreased and their real income has risen.

Question 38

A person pays cash for a house in 1990 for $200 000 and sells it in 2000 for $400 000.Over the same period the CPI has risen from its base index to 200.In terms of this asset,the purchasing power of this person:

A)has increased
B)has decreased
C)has remained unchanged
D)is indeterminate.
E)depends on his/her spending habits.

Question 39

The CPI measures:

A)changes in the prices of imported goods and services.
B)changes in the prices of exported goods and services.
C)changes in the production of imported goods and services.
D)changes in the production of exported goods and services.

Question 40

A person pays cash for a house in 1990 for $200 000 and sells it in 2000 for $400 000.Over the same period the CPI has risen from its base index to 250.In terms of this asset,the purchasing power of this person:

A)has increased.
B)has decreased.
C)has remained unchanged.
D)is indeterminate.

Question 41

The costs of hyperinflation on an economy are:

A)that people enjoy buying and reselling at higher prices.
B)that it can equate wealth between lenders and borrowers.
C)that it creates a continuous spending-price spiral.
D)that life insurance policies are jeopardised.

Question 42

During the 1970s,the Organization of Petroleum Exporting Countries (OPEC)sharply increased the price of oil which triggered higher inflation rates in Australia.This type of inflation is best classified as:

A)pseudo-inflation.
B)demand-pull inflation.
C)cost-push inflation.
D)hyperinflation.

Question 43

Demand-pull inflation:

A)is a shortage in demand.
B)is a lack of demand for local goods.
C)is an excess in nominal demand across many markets.
D)is an oversupply of imported goods.

Question 44

Cost-push inflation is due to:

A)'too much money chasing too few goods'.
B)the economy operating at full employment.
C)significant increases in production costs.
D)a decrease in production costs.

Question 45

Nominal income is:

A)the actual number of dollars received over the period of time, adjusted for changes in the CPI.
B)the actual number of dollars received over the period of time.
C)the actual number of dollars received over the period of time, adjusted for changes in the GDP.
D)the real number of dollars received over the period of time.

Question 46

The source of demand-pull inflation is a:

A)lack of expectations.
B)shortage of demand.
C)excess of demand.
D)high cost of production.

Question 47

If the CPI increases and the nominal income remains the same:

A)the nominal income increases.
B)the real income increases.
C)the real income falls.
D)the real income remains the same.
E)we cannot say whether any of these apply.

Question 48

The phrase 'too much money chasing too few goods' describes which type of inflation?

A)Demand-supply inflation.
B)Demand-push inflation.
C)Demand-pull inflation.
D)Demand-excess inflation.

Question 49

Which of the following statements is true?

A)Demand-pull inflation is caused by an increase in the cost of production.
B)Cost-push inflation is caused by an increase in spending.
C)If nominal interest rates remain the same and the inflation rate falls, real interest rates decrease.
D)If real interest rates are positive, borrowers incur losses.

Question 50

Cost-push inflation is:

A)only due to an increase in the cost of raw materials.
B)due to a reduction in demand.
C)only due to an increase in the cost of borrowing.
D)due to an increase in the cost of any inputs used in production.

Question 51

When OPEC raised the price of oil,it created:

A)demand-pull inflation.
B)cost-push inflation.
C)demand-push inflation.
D)cost-pull inflation.
E)cost-push deflation.

Question 52

Cost-push inflation is due to:

A)labour cost decreases.
B)higher spending.
C)raw material cost decreases.
D)an increase in input prices.

Question 53

Suppose buyers expect prices to rise dramatically in the near future.If they decide to purchase items today before the price rise,the possible result can be:

A)cost-push inflation.
B)demand-pull inflation.
C)deflation.
D)diminishing returns.
E)demand-push inflation.

Question 54

If the inflation rate rises unexpectedly,the winners will be:

A)lenders and borrowers.
B)lenders.
C)borrowers.
D)only those who invested in real estate.

Question 55

Which of the following can create demand-pull inflation?

A)Excessive aggregate spending.
B)Sharply rising oil prices.
C)Higher labour costs.
D)Recessions and depressions.

Question 56

Demand-pull inflation is due to:

A)minimum wage laws.
B)labour cost increases.
C)excess total spending.
D)tax increases.

Question 57

When inflation is low and stable,firms:

A)can easily make judgments about relative real rates of return on alternative investments.
B)can easily make judgments about relative nominal rates of return on alternative investments.
C)tend to invest more in real estate.
D)tend to invest more in tax effective investments

Question 58

Real income is:

A)any number of dollars received over the period of time.
B)the real number of dollars received over the period of time, adjusted for changes in the GDP.
C)the actual number of dollars received over the period of time, adjusted for changes in the GDP.
D)the actual number of dollars received over the period of time, adjusted for changes in the CPI.

Question 59

During periods of hyperinflation,which of the following is the most likely response of consumers?

A)Save as much as possible.
B)Spend money as fast as possible.
C)Invest as much as possible.
D)Lend money.
E)Work harder.

Question 60

Which of the following measures real purchasing power?

A)Real income.
B)Nominal income.
C)Increase in income.
D)Stable income.

Question 61

Consider an economy made up of 100 people,60 of whom hold jobs,10 of whom are looking for work and 15 of whom are retired.The number of people in the civilian labour force is:

A)30.
B)60.
C)70.
D)85.
E)90.

Question 62

A worker who wants to work,but who has given up searching for work because he/she believes there will be no offer is called:

A)a depressed worker.
B)a retired worker.
C)a discouraged worker.
D)an upset worker.

Question 63

Exclusion of which of the following tends to understate the true level of unemployment in the economy?

A)Children.
B)Retired persons.
C)Students.
D)People who do not want to work.
E)Discouraged workers.

Question 64

The official definition of unemployment:

A)overstates the unemployment rate by not accounting for underemployed workers.
B)understates the unemployment rate by not accounting for members of the armed forces.
C)understates the unemployment rate by not accounting for discouraged workers.
D)overstates the unemployment rate by not accounting for discouraged workers.

Question 65

The relatively high unemployment in many European countries has been attributed at least in part to:

A)a more flexible labour market.
B)higher inflation.
C)low wages.
D)a rigid labour market.
E)high economic growth.

Question 66

The civilian labour force consists of:

A)all civilians over the age of 16.
B)the employed plus the unemployed who are not in the military.
C)only individuals who are actually at work during a given week.
D)civilians who are not in prisons or mental hospitals.

Question 67

Martin Malick lost his job when Holden closed down its local plant.He has been visiting the personnel offices of the other factories in the area,looking for a new job.He is:

A)a member of the civilian labour force who is employed.
B)a member of the civilian labour force who is unemployed.
C)a member of the civilian labour force who is underemployed.
D)a discouraged worker who is not a member of the labour force.
E)not a member of the labour force.

Question 68

The civilian labour force is:

A)the number of people (including students) aged 15 and over who are unemployed.
B)the number of people (including students) aged 15 and over who are either employed or unemployed.
C)the number of people (including students) aged 15 and over who are either employed or unemployed, excluding people in hospitals.
D)the number of people (excluding students) aged 15 and over who are either employed or unemployed, excluding members of the armed forces and certain categories of people.

Question 69

Which one of the following people is not a member of the labour force?

A)Relief teacher who works 2 hours a week.
B)A person who works 30 hours a week at McDonalds and goes to school at night.
C)The man who was fired last week and is searching for a new job.
D)A full-time student who devotes all her time to her classes.
E)A professional athlete.

Question 70

Which of the following categories of people are in the labour force?

A)The armed forces.
B)Household workers.
C)Students.
D)Unemployed.

Question 71

During the 1990s,which of the following countries had the highest unemployment rate?

A)The United States.
B)Japan.
C)Australia.
D)Canada.
E)France.

Question 72

People who are not currently employed,but say they want a job,are counted as unemployed only if they:

A)have previously held a job.
B)are actively seeking employment.
C)are willing to accept a reasonable offer.
D)are between 16 and 65 years of age.
E)are willing to accept any offer of employment.

Question 73

Find the size of the civilian labour force from the following data: frictional unemployment = 150,structural unemployment = 200,cyclical unemployment = 225,discouraged workers = 25,underemployed workers = 75,fully employed workers = 850,total population = 2000.

A)1425.
B)1450.
C)1500.
D)1525.
E)2000.

Question 74

Hyperinflation causes:

A)nominal interest rates to fall, leading to unproductive investment decisions by firms.
B)real interest rates to fluctuate, leading to uncertainty in investment decisions.
C)nominal interest rates to rise, but leaves the real interest rate constant.
D)nominal interest rates to fluctuate, leading to lower nominal wages.

Question 75

When hyperinflation occurs:

A)people try to spend their wages as soon as they receive them.
B)people save more of their income, which therefore decreases investment.
C)nominal wages remain constant, but prices rise, leading to an increase in purchasing power.
D)people cut back on consumption and increase saving.

Question 76

According to the Australian Bureau of Statistics (ABS),any person who claims on an ABS survey that she/he is performing only unpaid household duties is:

A)retired.
B)unemployed.
C)re-employable.
D)not a member of the labour force.

Question 77

A person who has given up searching for work is called:

A)frictionally unemployed.
B)structurally unemployed.
C)a discouraged worker.
D)unemployed.

Question 78

Andrea Burris lost her job in a company layoff five months ago.She would take a job if one was offered,but she has given up looking for work until the economy improves.She is:

A)a member of the civilian labour force who is employed.
B)a member of the civilian labour force who is unemployed.
C)a member of the civilian labour force who is underemployed.
D)a discouraged worker who is not a member of the labour force.
E)now structurally unemployable.

Question 79

The highest unemployment rate in the 20th century was:

A)over 5 per cent.
B)over 15 per cent.
C)over 25 per cent.
D)less than 20 per cent.
E)around 12 per cent.

Question 80

A wage-price spiral occurs:

A)when firms need to continually meet higher wage demands because unemployment is close to zero.
B)when falling wages lead to rapidly falling prices, causing deflation.
C)when higher prices lead to rapidly falling real wages, which prompts demands for higher nominal wages.
D)when wages are indexed by law to the CPI.