Deck 8: Inflation

Question 1

Core inflation includes energy and food cost increases.

Answer 1

False
Explanation: Core inflation does not include energy and food cost increases.

Question 2

The average price level measures how much it costs to buy a market basket of common goods and services.

Answer 2

True
Explanation: The average price level measures how much it costs to buy a market basket of common goods and services.

Question 3

Between 2000 and 2010,which of the following experienced a negative inflation rate?

A) Gasoline
B) College tuition.
C) Medical care.
D) Wireless phone service.

Answer 3

D
Explanation: Wireless phone service experienced a -2.0% inflation rate during the 2000-2010 period.

Question 4

Core inflation is defined as

A) inflation that takes energy and food into account.
B) inflation that does not take energy and food into account.
C) inflation that takes health care and energy into account.
D) inflation that does not take health care and energy into account.

Question 5

The BLS has chosen 90 to represent the average 1982-1984 price level,and it now measures all other years relative to this base year.

Question 6

The CPI measures the changes of one category of products.

Question 7

The phrase "owners' equivalent rent of primary residence" means the cost of housing services for one year.

Question 8

Inflation can be defined as

A) an overall increase in prices.
B) a decline in prices.
C) a basic component of market balance.
D) the situation that exists when exports exceed imports.

Question 9

Inflation is

A) one of the key measures in the GDP.
B) one of the key measures of the health of an economy.
C) generally steady from year to year.
D) generally beneficial to countries.

Question 10

A relative price shift occurs when

A) the inflation rate of a good or service remains unchanged.
B) the inflation rate of a good or service is significantly higher or lower than the overall inflation rate.
C) the inflation rate of a good or service matches the overall inflation rate.
D) inflation exceeds the average revenue per capita.

Question 11

The inflation rate is the annual percentage change in the average price level.

Question 12

In order to create an index for consumer prices,the BLS chose

A) 100 to represent the average 1982-1984 price level.
B) 50 to represent the average 1982-1984 price level.
C) 100 to represent the average 1972-1974 price level.
D) 100 to represent the average 1992-1994 price level.

Question 13

Some goods have become less expensive due to

A) globalization and technology.
B) government deregulation.
C) government regulation.
D) GDP growth.

Question 14

Nominal increases take into account inflation adjustments over a period of time.

Question 15

Real dollars are also called inflation-adjusted dollars.

Question 16

The biggest declines in prices in the last few years have come from medical care.

Question 17

The average price level is equivalent to

A) the price of a single good.
B) the price of a market basket of goods.
C) the price of exports.
D) the price of imports.

Question 18

Money illusion occurs when we compare dollar amounts

A) without adjusting for technology.
B) without adjusting for inflation.
C) between two years.
D) between the CPI and the GDP.

Question 19

What is the CPI?

A) The Consumer Price Institute.
B) The consumer price index.
C) The consumer product index.
D) The consumer protection index.

Question 20

The inflation-adjusted percentage change is the nominal percentage change plus the inflation rate.

Question 21

Unexpectedly high inflation tends to hurt _______ most.

A) borrowers
B) lenders
C) policy makers
D) businesses

Question 22

As of 2009,the average household earned $49,777.In 1979,the average household earned $16,461.Although it appears as though incomes have tripled,other prices have risen too.This illustrates a concept known as

A) deflation.
B) disinflation.
C) money illusion.
D) COLA.

Question 23

Disinflation is

A) a decrease in prices.
B) a decrease in inflation rates.
C) an increase in prices.
D) an increase in inflation rates.

Question 24

A pure price change occurs

A) when inflation increases the price of an item.
B) when technology and quality improve an item.
C) when inflation exceeds expected inflation rates.
D) with unanticipated inflation.

Question 25

A new iPod with 30 new features costs $100 more to produce and buy than does the previous version.The $100 price increase

A) is added to the inflation rate.
B) is not added to the inflation rate because consumer electronics are not part of the inflation rate.
C) is not added to the inflation rate because it represents an improvement in quality.
D) is divided by the additional benefits and then added to the inflation rate.

Question 26

A wage-price spiral occurs when

A) businesses boost prices and wages to try to stay ahead of higher-than-expected inflation.
B) businesses reduce prices and wages to try to stay ahead of higher-than-expected deflation.
C) businesses boost production to try to stay ahead of higher-than-expected inflation.
D) businesses reduce production to try to stay ahead of higher-than-expected inflation.

Question 27

The Bureau of Labor Statistics has chosen the price level from __________ to be the base price level used in calculating the CPI.

A) 1992
B) 1982-1984
C) 2000-2005
D) 1995

Question 28

What is deflation?

A) An increase in the price level that reduces the GDP.
B) A decrease in the price level.
C) A decrease in the rate of inflation.
D) A reduction in GDP caused by changes in the price level.

Question 29

Expected inflation is

A) anticipating inflation over 2% from year to year.
B) the amount of inflation that households and businesses expect will continue into the future.
C) the opposite of disinflation.
D) based on inflation-adjusted averages year to year.

Question 30

As an example of hyperinflation,one U.S.dollar was equal to _________ German marks in 1923,compared to 8.9 marks in 1919.

A) 0.001
B) 1
C) 1,000
D) 1 trillion

Question 31

If unexpected inflation is good for borrowers,unexpected deflation is good for

A) borrowers, too.
B) lenders.
C) businesses.
D) governments.

Question 32

Hyperinflation is

A) a moderate increase in prices from year to year.
B) a very rapid increase in prices from year to year.
C) inflation calculated using new technology.
D) inflation calculated based on the CPI model.

Question 33

Of the categories of spending listed below,which is the smallest component of the market basket?

A) Food at home.
B) Medical care.
C) Apparel.
D) Education.

Question 34

If an auto manufacturer installs antilock brakes on a vehicle,and that alone causes the price to increase by $100,the BLS

A) counts that increase as part of the inflation rate.
B) does not count that increase as part of the inflation rate.
C) subtracts that price increase from the overall inflation rate.
D) counts only $50 of the price increase as part of the inflation rate.

Question 35

Which goods did NOT decrease in price between 2000 and 2010?

A) Personal computers and peripherals.
B) Alcoholic beverages away from home.
C) Televisions.
D) New vehicles.

Question 36

Expected inflation is

A) the inflation rate that governments require from year to year.
B) the inflation rate that consumers and businesses expect will hold for some time in the future.
C) the inflation rate that is based on GDP growth.
D) the inflation rate minus the actual growth rate.

Question 37

Which is NOT a category of goods included in the BLS's consumer market basket?

A) Communication.
B) New vehicles.
C) Medical care.
D) Business office supplies.

Question 38

The formula for a real percentage change is

A) the nominal percentage change minus the inflation rate.
B) the nominal percentage change divided by the inflation rate.
C) the nominal percentage change plus the inflation rate.
D) the nominal percentage change multiplied by the inflation rate.

Question 39

What does the phrase "owners' equivalent rent" mean?

A) It is the price of five years' worth of housing services.
B) It is the price of a home.
C) It is the value of a year's worth of housing services.
D) It is the value of three years' worth of housing services.

Question 40

An dollar-amount increase that has not been adjusted for inflation is called

A) a real increase.
B) a nominal increase.
C) a net increase.
D) a inflationary increase.

Question 41

Which of the following countries has not experienced hyperinflation?

A) Norway.
B) Brazil.
C) Germany.
D) Bolivia.

Question 42

Which of the following is an example of a company "offshoring" part of the production of a service?

A) Scissors for haircuts being produced in China.
B) Technicians overseas reading X-rays taken in the United States.
C) An American traveler getting a tattoo while in Germany.
D) Foreign students studying at American universities.

Question 43

Suppose a technological advancement makes automobiles 50% safer,and at the same time,the prices of automobiles go up by 25%.No other prices in the economy changed.Did the relative price of automobiles rise or fall?

A) It depends on whether the safety improvements raise the cost of producing automobiles by more than, less than, or exactly 25%.
B) The relative price of automobiles rose because the price went up by 25% when other prices did not rise.
C) The relative price of automobiles fell because the price increased by 25% but the safety increased by 50%.
D) It depends on whether consumers demand safer cars.

Question 44

$$\begin{array}{l}\begin{array} { | c | c | } \hline \text { Good } & \begin{array} { c } \text { Price Increase since } \\\text { Last Year }\end{array} \\\hline \text { Amusement park tickets } & 5.0 \% \\\hline \text { Bowling balls } & 4.2 \% \\\hline \text { Camouflage neckties } & 3.1 \% \\\hline\end{array}\\\text { Table } 8.1\end{array}$$ Refer to Table 8.1,which gives hypothetical data on price changes for three goods.If the overall rate of inflation in the economy was 3.5%,which good(s)experienced a relative price increase?

A) Amusement park tickets only.
B) Amusement park tickets and bowling balls.
C) Camouflage neckties only.
D) All three goods experienced relative price increases.

Question 45

The category of spending called "food away from home" makes up a smaller proportion of the market basket than which of the following categories?

A) Medical care.
B) Gasoline.
C) Education.
D) Food at home.

Question 46

Money illusion occurs

A) at a magic show.
B) when money disappears.
C) when we disregard inflation adjustments for dollar values.
D) when prices decrease.

Question 47

What is the cost of transactions as it relates to the harm caused by inflation?

A) The cost associated with the time and effort of managing your spending.
B) The cost of the products whose prices are rising.
C) Production costs plus profit.
D) The cost of the BLS market basket.

Question 48

$$\begin{array}{l}\begin{array} { | c | c | } \hline \text { Good } & \begin{array} { c } \text { Price Increase since } \\\text { Last Year }\end{array} \\\hline \text { Amusement park tickets } & 5.0 \% \\\hline \text { Bowling balls } & 4.2 \% \\\hline \text { Camouflage neckties } & 3.1 \% \\\hline\end{array}\\\text { Table } 8.1\end{array}$$ Refer to Table 8.1,which gives hypothetical data on price changes for three goods.If the overall rate of inflation in the economy was 3.5%,what happened to the real price of amusement park tickets?

A) The real price of amusement park tickets rose by 1.5%.
B) The real price of amusement park tickets rose by 8.5%.
C) The real price of amusement park tickets rose by 5.0%
D) The real price of amusement park tickets fell by 1.5%.

Question 49

$$\begin{array}{l}\begin{array} { | c | c | } \hline \text { Good } & \begin{array} { c } \text { Price Increase since } \\\text { Last Year }\end{array} \\\hline \text { Amusement park tickets } & 5.0 \% \\\hline \text { Bowling balls } & 4.2 \% \\\hline \text { Camouflage neckties } & 3.1 \% \\\hline\end{array}\\\text { Table } 8.1\end{array}$$ Refer to Table 8.1,which gives hypothetical data on price changes for three goods.Which good(s)became relatively more expensive for buyers?

A) Amusement park tickets only.
B) None of the goods became relatively more expensive.
C) It depends on the overall rate of inflation in the economy.
D) All three goods became relatively more expensive.

Question 50

$$\begin{array}{l}\begin{array} { | c | c | c | } \hline \text { Year } & \begin{array} { c } \text { Antonio's Nominal } \\\text { Hourly Wage }\end{array} & \begin{array} { c } \text { Consumer Price } \\\text { Index }\end{array} \\\hline 2006 & \$ 8.40 & 201.6 \\\hline 2010 & \$ 9.05 & 218.1 \\\hline\end{array}\\\text { Table } 8.2\end{array}$$ Refer to Table 8.2.From 2006 to 2010,Antonio received a total of $0.65 in pay raises,and the CPI also increased as shown in the table.What was Antonio's real wage in 2006,if 2010 is used as the base year?

A) $8.40.
B) $9.05.
C) $9.09.
D) $8.37.

Question 51

Annual inflation equal to 1,000% means that prices are rising by

A) 100 times in a year.
B) 10 times in a year.
C) 500 times in a year.
D) 1,000 times in a year.

Question 52

$$\begin{array}{l}\begin{array} { | c | c | } \hline \text { Good } & \begin{array} { c } \text { Price Increase since } \\\text { Last Year }\end{array} \\\hline \text { Amusement park tickets } & 5.0 \% \\\hline \text { Bowling balls } & 4.2 \% \\\hline \text { Camouflage neckties } & 3.1 \% \\\hline\end{array}\\\text { Table } 8.1\end{array}$$ Refer to Table 8.1,which gives hypothetical data on price changes for three goods.At which of the following overall rates of inflation would it be true that bowling balls became relatively cheaper?

A) 4.5%.
B) 4.2%.
C) 3.5%.
D) -1.5%.

Question 53

Unexpected inflation can often

A) reduce price levels below cost.
B) reduce wages below the inflation rate.
C) help borrowers by allowing them to pay back lenders with less valuable dollars.
D) help lenders collect payments in more valuable dollars.

Question 54

COLA provisions automatically increase wages or benefits to match

A) inflation.
B) disinflation.
C) deflation.
D) the cost of living.

Question 55

$$\begin{array}{l}\begin{array} { | c | c | } \hline \text { Good } & \begin{array} { c } \text { Price Increase since } \\\text { Last Year }\end{array} \\\hline \text { Amusement park tickets } & 5.0 \% \\\hline \text { Bowling balls } & 4.2 \% \\\hline \text { Camouflage neckties } & 3.1 \% \\\hline\end{array}\\\text { Table } 8.1\end{array}$$ Refer to Table 8.1,which gives hypothetical data on price changes for three goods.If the overall rate of inflation in the economy was 3.5%,what happened to the real price of camouflage neckties?

A) The real price of camouflage neckties fell by 0.4%.
B) The real price of camouflage neckties rose by 0.4%.
C) The real price of camouflage neckties rose by 6.6%.
D) The real price of camouflage neckties fell by 6.6%.

Question 56

In the United States,inflation peaked around

A) 1980.
B) 1982-1984.
C) 1929.
D)1973.

Question 57

Certain behavior associated with expected inflation can

A) reduce inflation rates overall.
B) allow lenders to collect with more valuable dollars.
C) allow borrowers to pay with more valuable dollars.
D) actually increase the overall rate of inflation.

Question 58

$$\begin{array}{l}\begin{array} { | c | c | } \hline \text { Good } & \begin{array} { c } \text { Price Increase since } \\\text { Last Year }\end{array} \\\hline \text { Amusement park tickets } & 5.0 \% \\\hline \text { Bowling balls } & 4.2 \% \\\hline \text { Camouflage neckties } & 3.1 \% \\\hline\end{array}\\\text { Table } 8.1\end{array}$$ Refer to Table 8.1,which gives hypothetical data on price changes for three goods.If the overall rate of inflation in the economy was 4.5%,which of the following statements is true?

A) The real price of all three goods increased.
B) The real price of amusement park tickets rose, and the real price of bowling balls and camouflage neckties fell.
C) The real price of amusement park tickets fell, and the real price of bowling balls and camouflage neckties rose.
D) The real price of all three goods decreased.

Question 59

Disinflation and deflation are

A) two different terms that describe the same thing.
B) often confused with each other.
C) exact opposites.
D) terms used to describe changes to the GDP.

Question 60

In 1973,the oil embargo sparked a wage-price spiral due to higher energy costs.In 2004,with a similar spike in oil prices,there was not a corresponding wage-price spiral.The cause of this was

A) Heavy government regulation.
B) Alternative energy sources.
C) Competition from overseas keeping a lid on wages and prices.
D) Unanticipated inflation.

Question 61

What is a pure price change?

Question 62

Federal spending on elementary and secondary education rose from $39.7 billion to $40 billion in 2007.Inflation at the time was 2.5%.Explain what happened to real spending on education in 2007.

Question 63

Explain how globalization has caused some goods to be cheaper.

Question 64

Why does core inflation not include energy or food prices?

Question 65

$$\begin{array}{l}\begin{array} { | c | c | c | } \hline \text { Year } & \begin{array} { c } \text { Antonio's Nominal } \\\text { Hourly Wage }\end{array} & \begin{array} { c } \text { Consumer Price } \\\text { Index }\end{array} \\\hline 2006 & \$ 8.40 & 201.6 \\\hline 2010 & \$ 9.05 & 218.1 \\\hline\end{array}\\\text { Table } 8.2\end{array}$$ Refer to Table 8.2.From 2006 to 2010,Antonio received a total of $0.65 in pay raises,and the CPI also increased as shown in the table.What happened to Antonio's real wage from 2006 to 2010?

A) It rose because $9.05 is greater than $8.40.
B) It rose because Antonio's nominal wage and the CPI were both higher in 2010 than in 2006.
C) It fell because Antonio's nominal wage rose more slowly than did the CPI.
D) It fell because the change in the CPI was 16.5, which is greater than Antonio's wage.

Question 66

What is one way to avoid money illusion?

Question 67

$$\begin{array}{l}\begin{array} { | c | c | c | } \hline \text { Year } & \begin{array} { c } \text { Antonio's Nominal } \\\text { Hourly Wage }\end{array} & \begin{array} { c } \text { Consumer Price } \\\text { Index }\end{array} \\\hline 2006 & \$ 8.40 & 201.6 \\\hline 2010 & \$ 9.05 & 218.1 \\\hline\end{array}\\\text { Table } 8.2\end{array}$$ Refer to Table 8.2.From 2006 to 2010,Antonio received a total of $0.65 in pay raises,and the CPI also increased as shown in the table.What was Antonio's real wage in 2010,if 2006 is used as the base year?

A) $8.40.
B) $9.05.
C) $9.09.
D) $8.37.

Question 68

$$\begin{array}{l}\begin{array} { | c | c | c | } \hline \text { Year } & \begin{array} { c } \text { Antonio's Nominal } \\\text { Hourly Wage }\end{array} & \begin{array} { c } \text { Consumer Price } \\\text { Index }\end{array} \\\hline 2006 & \$ 8.40 & 201.6 \\\hline 2010 & \$ 9.05 & 218.1 \\\hline\end{array}\\\text { Table } 8.2\end{array}$$ Refer to Table 8.2.From 2006 to 2010,Antonio received a total of $0.65 in pay raises,and the CPI also increased as shown in the table.What was Antonio's real wage in 2006,if 2006 is used as the base year?

A) $8.40.
B) $9.05.
C) $9.09.
D) $8.37.