Question 1

Refer to the following table to answer the next four questions:
 
-As presented in the table,the rate of inflation (or deflation) from 2002-2003 was (rounded to two decimal places):

Accepted Answer

A)   112.00%.
B)   108.00%.
C)   4.00%.
D)   -4.25%.
E)   -3.57%. E

Question 2

As a business owner,you find that your resource prices are increasing often.Because these costs are rising,you find it necessary to change your prices frequently.This best describes:

Accepted Answer

A)   future price uncertainty.
B)   menu costs.
C)   money illusion.
D)   hyperinflation.
E)   a price confusion problem. B

Question 3

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

Accepted Answer

The prices of 8,000 goods are measured in 38 geographic locations.These are the prices for common items that a typical consumer would buy.Each of these goods is given a weighted average,which means that those goods that represent a larger percentage of the market basket,such as housing,count more (are weighted more heavily) than others,such as clothing,that count less.

Question 4

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.

Question 5

Michael Chang buys only tennis rackets during a particular year.During the year in question,the price of all goods rises by 10% 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 racquets.
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 6

Quality changes:

Accepted Answer

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

Question 7

If your nominal wage rises but you think that it automatically means your real wage rose,then:

Accepted Answer

A)   you are suffering from money illusion.
B)   you are experiencing the substitution effect.
C)   you are suffering from the heterogeneity illusion effect.
D)   you are experiencing the income effect.
E)   you are suffering from the price confusion problem.

Question 8

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 9

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

Accepted Answer

A)   because the price of dog food fell by more than the price of cat food rose, the consumer price index (CPI)  must have decreased.
B)   the CPI in Felixania is more than in the previous year.
C)   if consumers get a 4% pay raise, they are worse off in terms of their real income compared to inflation as measured by the Felixanian CPI.
D)   because cat food is a luxury (as is dog food) , consumers are certainly no worse off in terms of their real wages as measured by the Felixanian CPI.
E)   menu costs have decreased.

Question 10

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,and in San Diego it is 132.3.If real wages are the only consideration,then:

Accepted Answer

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

Question 11

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 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 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 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 CPI because the creator of the CPI, Milton Marquis, did not like oranges.

Question 12

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 13

You get a pay raise and feel richer even though your raise did not keep up with inflation; this is best described as:

Accepted Answer

A)   menu costs.
B)   price confusion.
C)   future price uncertainty.
D)   money illusion.
E)   nominal income uncertainty.

Question 14

If 51% of all goods in the consumer price index (CPI) became more expensive and 49% 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 percent 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 15

If everyone buys the same goods every year and the price of housing rises by 38%:

Accepted Answer

A)   it is certain the consumer price index (CPI)  has increased; and if your nominal wage has risen by less than 38%, your real wage has fallen.
B)   it is certain the CPI has increased; and if your nominal wage has risen by more than 38%, your real wage has risen.
C)   it is possible that the CPI has increased, but it is certain your real wage has fallen.
D)   it is possible that the CPI has increased.However, it is certain your real wage has risen, if and only if, your nominal wage increased by more than 19% because housing accounts for exactly 50% of the CPI.
E)   it is not possible to tell what happened to the CPI because other than for housing, we do not know what happened to the prices of any of the other goods.

Question 16

The agency that measures the consumer price index (CPI) in the United States is:

Accepted Answer

A)   the Bureau of Economic Analysis.
B)   the Bureau of Labor Statistics.
C)   the Economic Adjustment Agency.
D)   the Department of Commerce Price Index Office.
E)   the Department of Vital Statistics.

Question 17

If housing prices increase by 25% and the price of all other goods decreases by 22%,then:

Accepted Answer

A)   the consumer price index (CPI)  would definitely fall during the year in question because housing prices do not constitute the majority of the CPI.
B)   the CPI would definitely rise during the year in questions because housing prices do constitute the majority of the CPI.
C)   the CPI would rise by about 1.5% because housing constitutes about half of the market basket in the CPI.
D)   because housing spending is considered investment, the producer price index (PPI)  but not the CPI would be the only price index affected by the change.
E)   the CPI would only be affected in a small way because it includes about 8,000 goods and housing is only one of the 8,000.

Question 18

The average inflation rate in the United States from 2000-2012 was about:

Accepted Answer

A)   20%.
B)   10%.
C)   5%.
D)   2%.
E)   -4%.

Question 19

In the 1970s,the government attempted to regulate prices to control inflation; this attempt was unsuccessful.The most likely reason was that:

Accepted Answer

A)   it increased menu costs.
B)   it created future price certainty.
C)   it removed relative price signals for those items that had actual increases in demand that were not due to inflation.
D)   it created money illusion.
E)   the Watergate break-in destroyed Americans' faith in the government.

Question 20

Refer to the following figure when answering the next five questions:
 
-Based on the figure,and if we define inflation as being "under control" at rates less than 10%,when was inflation under control?

Accepted Answer

A)   1996-2002 only
B)   1997-2003 and 2005-2011
C)   2005-2011 only
D)   1996-1997 only
E)   It was never under control.

Exam 8: The Price Level and Inflation

Refer to the following table to answer the next four questions: -As presented in the table,the rate of inflation (or deflation) from 2002-2003 was (rounded to two decimal places) :