Question 1

Michael Chang buys only tennis rackets during a particular year. During the year in question, the price of all goods rises by 10 percent on average, but the price of tennis rackets remains the same. Which statement is correct?

Accepted Answer

A)  Michael benefits from inflation. 
B)  Michael does not experience inflation because he only buys tennis rackets. 
C)  No matter what Michael buys, he experiences inflation. 
D)  Michael does not benefit from inflation. 
E)  We can't conclude anything from the information given.

Question 2

If real income increases, then nominal income

Accepted Answer

A)  increases. 
B)  increases if the price index falls. 
C)  rises faster than prices. 
D)  remains constant but the majority of goods in the consumer price index CPI) get cheaper. 
E)  decreases.

Question 3

Use the graph shown to discuss, in qualitative terms, the changes in the U.S. inflation rate from 1960 to 2012. Then estimate the inflation rate in 2012.

Accepted Answer

The answer of Use the graph shown to discuss, in...

Question 4

Assume tuition at Houston Community College cost $588 per semester) in 2004 and $813 in 2012. If the price index was 184 in 2004 and 226 in 2012, then we could say

Accepted Answer

A)  tuition has increased more slowly than inflation. 
B)  tuition has increased more rapidly than inflation. 
C)  tuition has increased at about the same rate as inflation. 
D)  nominal tuition has decreased. 
E)  tuition suffers from menu costs due to inflation.

Question 5

Donna Newton made $0.30 per hour in 1946 at a small restaurant in Clearfield, Pennsylvania. If the consumer price index CPI) was 18.3 in 1946 and 202.4 in 2011 and the legal minimum wage in 2011 was $7.25, then

Accepted Answer

A)  Donna's inflation-adjusted wage would be greater than the legal minimum wage in 2011. 
B)  Donna's inflation-adjusted wage would be less than the legal minimum wage in 2011. 
C)  Donna's inflation-adjusted wage would be equal to the legal minimum wage in 2011. 
D)  Donna would suffer from money illusion in 2011 if her real wage rose, holding her nominal wage constant. 
E)  because of deflation in the years between 1946 and 2011, the inflation-adjusted wage would exceed the legal minimum in 2011.

Question 6

In Country Z, the prices of goods are measured on an annual basis on the last day of the year. In Country Y, the prices of goods are measured on a weekly basis every Wednesday. Comparing the two countries based on this information,

Accepted Answer

A)  Country Y more accurately combats the upward bias of its price index by using a chained index. 
B)  Country Z more accurately combats the upward bias of its price index by using a chained index. 
C)  Country Z will experience hyperinflation. 
D)  Country Y will experience hyperinflation. 
E)  neither country has a very good price index if consumer purchasing habits change; a chained index usually outperforms a traditional index.

Question 7

What is one reason why a government will deliberately inflate its national money supply?

Accepted Answer

A)  The action promotes the long-term health of the national economy. 
B)  The action is part of efforts to attract overseas investors and immigrant labor. 
C)  The action is part of printing money to pay off the government's debts. 
D)  The action tamps down the growth rate of an overheated economy. 
E)  The action helps the money supply keep up with the consequences of rising prices.

Question 8

Donna Newton made $0.30 per hour in 1946 at a small restaurant in Clearfield, Pennsylvania. If the consumer price index CPI) was 18.3 in 1946 and 202.4 in 2011, then Donna's inflation-adjusted wage would be

Accepted Answer

A)  $7.25, by U.S. law. 
B)  $0.30. 
C)  $2.87. 
D)  $0.61. 
E)  $3.32.

Question 9

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

Accepted Answer

A)  both real and nominal wages are rising. 
B)  both real and nominal wages are falling. 
C)  if you have no job and have no income, you are better off because things are cheaper. 
D)  holding nominal wages constant, the real wage would rise. 
E)  holding nominal wages constant, the real wage would fall.

Question 10

According to the price confusion problem, if the price of a product increases, then

Accepted Answer

A)  the market demand has increased, and the firm's output should increase. 
B)  the market demand has increased, and the firm's output should decrease. 
C)  the price increase is due to inflation, and the firm's output should increase. 
D)  the price increase is due to inflation, and the firm's output should decrease. 
E)  prices as a whole fall, and the firm's output should increase.

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."

Question 12

What did Milton Friedman mean by saying that "inflation is always and everywhere a monetary phenomenon"?

Accepted Answer

A)  Inflation only affects those who hold money, as savings or in the form of investments. 
B)  Inflation is due to cash transactions, not transactions based on credit. 
C)  In any economy that uses money as a medium of exchange, there will always be some inflation. 
D)  Inflation is about rising prices, not about rising productivity. 
E)  Inflation is caused by an increase in the money supply relative to the quantity of goods and services.

Question 13

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.

Question 14

Describe menu costs.

Accepted Answer

The answer of Describe menu costs....

Question 15

If a bank expects inflation to increase in the near future, how will it respond?

Accepted Answer

A)  It will start paying less interest on deposits. 
B)  It will seek to reduce the amount of cash held in its vaults. 
C)  It will temporarily scale back its efforts to gain new customers. 
D)  It will start charging more interest on loans. 
E)  It will temporarily suspend withdrawals.

Question 16

If people bought the same market basket of goods as the average consumer again and again the

Accepted Answer

A)  consumer price index CPI) would be extremely accurate. 
B)  consumer price index CPI) would be less accurate. 
C)  gross domestic product GDP) deflator would be more accurate. 
D)  gross domestic product GDP) deflator would be less accurate. 
E)  consumer price index CPI) would be biased upward relative to the GDP deflator.

Question 17

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.

Question 18

Typically, the largest percentage category in the consumer price index CPI) is

Accepted Answer

A)  transportation. 
B)  education. 
C)  food and beverages. 
D)  housing. 
E)  medical care.

Question 19

Deflation

Accepted Answer

A)  automatically implies that, on average, everyone is better off because prices have fallen. 
B)  is the same as disinflation; it means the rate of inflation has fallen. 
C)  will make you better off if your nominal wages fall more slowly than prices. 
D)  will make you better off if your nominal wages fall more rapidly than prices. 
E)  will make you better off if your real wages fall more rapidly than prices.

Question 20

You are offered two jobs, one in Richmond, Virginia, paying $67,000, and one in San Diego, California, paying $79,000. The price index in Richmond is 104.5; in San Diego it is 132.3. If real wages are the only consideration, then you would

Accepted Answer

A)  be indifferent between the two jobs because the real wages would be about the same within 2 percent). 
B)  definitely take the job in Richmond because the real wage is higher there. 
C)  definitely take the job in San Diego because the real wage is higher there. 
D)  likely take the job in Richmond because there is a Federal Reserve bank there and it would control inflation in the area. 
E)  likely take the job in San Diego, because better weather is directly correlated to real wages.

Exam 8: The Price Level and Inflation