Economy Today 13th Edition Schiller Test Bank 1

Economy Today 13th Edition by Schiller
Hill Wall ISBN 0073523216

9780073523217
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Chapter 07
Inflation
Multiple Choice Questions
1. Inflation is
A. A rise in the price of every good but not any service.
B. An increase in relative prices of all goods and services.
C. A situation in which purchasing power increases.
D. An increase in the average level of prices of goods and services.

2. Inflation rates above 10 percent rarely occur
A. In most countries today.
B. In the United States.
C. During wartime periods.
D. None of the other choices.
3. Inflation means
A. Specific prices are rising, and relative prices are falling.
B. Both relative prices and average prices are rising.
C. Relative prices are rising, but it is not certain what is happening to average
prices.
D. Average prices are rising, but it is not certain what is happening to relative
prices.
4. A decrease in the average level of prices of goods and services is
A. Deflation.
B. Recession.
C. Depression.
D. Inflation.
5. Deflation is a/an ____________ in the average level of prices of goods and
services.
A. increase
B. decrease
C. stagnation
D. increase followed by a decrease
6. When there is no deflation or inflation,
A. Prices of all goods change by the same percentage.
B. Relative prices remain unchanged.
C. Average prices do not change.
D. Full employment is achieved.

7.
According to Figure 7.1 in Country A,
A. Relative prices may have been changing, but average prices were constant.
B. Relative prices were definitely constant.
C. Average prices and relative prices were definitely changing.
D. Average prices were constant, and unemployment was increasing.

8.
According to Figure 7.1, which of the following statements was definitely true
about Country B?
A. Relative prices were changing.
B. The price level in general increased over the time period 1970 to 1995.
C. Real incomes were increasing.
D. The price level was about the same in 1970 and 1995.
9.
During the time period represented in Figure 7.1, Country A
A. Experienced periods of both inflation and deflation.
B. Never achieved the inflation goal set by the Full Employment and Balanced
Growth Act of 1978.
C. Had no need for COLAs.
D. Experienced only inflation.

10.
In the year 1995, which of the following statements is true about the two
countries represented in Figure 7.2?
A. The countries had approximately the same rate of inflation.
B. The CPI was virtually equal in the two countries.
C. The market basket cost approximately the same in both countries.
D. Real incomes were rising at the same rate in both countries.

11. Relative price is
A. The price of one good in comparison with the price of other goods.
B. A decrease in purchasing power because of rising prices.
C. The amount of income a particular good requires.
D. The current price paid for a good or service.
12. Changes in relative prices may occur in a period of
A. Stable prices only.
B. Inflation only.
C. Deflation only.
D. Stable prices, inflation, or deflation.
13. Changes in the relative prices of two goods indicate
A. Inflation.
B. Nominal price changes adjusted for the inflation in the price of the goods.
C. That average prices for the period must not be stable.
D. Changes in the desired mix of output.

14. Which of the following functions are performed by changes in relative prices
but not by changes in average prices?
A. Computing real income from nominal income.
B. Indicating an overheating economy.
C. Signaling changes in the desired mix of output.
D. Measuring the rates of inflation.
15. If the price of iPods rises 10 percent during a year when the level of average
prices rises 3 percent, the relative price of iPods compared with other goods
A. Remains constant.
B. Increases.
C. Decreases.
D. More information is required to answer this question.
16. If the price of Bluetooth headsets rises 12 percent during a year when the
level of average prices rises 13 percent, the relative price of Bluetooth
headsets
B. Increases.
C. Decreases.

17. When the price of a good decreases more slowly than an index of average
prices decreases, the good's relative price
A. Has risen while its absolute price has fallen.
B. And its absolute price have risen.
C. And its absolute price have fallen.
D. Has fallen while its absolute price has risen.
18. Comparing changes in relative prices is more useful than examining average
prices in
A. Determining the redistribution of income.
B. Determining the inflation rate.
C. Deflating nominal income.
D. Determining if there is deflation.
19. Which of the following explains why redistribution occurs during inflation?
A. Rising prices fail to signal desirable changes in the mix of output.
B. Because all prices do not change at the same rate, people buy different
combinations of goods and services and own different combinations of
wealth.
C. Relative prices remain unchanged.
D. All loans are indexed to inflation.

20. Which of the following results from unexpected increases in the rate of
inflation?
A. Decreased uncertainty.
B. Increased windfall profits to creditors who have lent large amounts of

money.
C. Redistributions of income and wealth between different groups.
D. Creditors are made better off.
21. The redistributive mechanics of inflation include all of the following except
A. Price effects.
B. Income effects.
C. Wealth effects.
D. Output effects.
22. All of the following are microeconomic consequences of inflation except
A. A price effect.
B. An income effect.
C. A wealth effect.
D. A profit effect.
23. Which of the following is not true about your nominal income?
A. It is the amount of money you receive during a given time period.
B. It is measured in current dollars.
C. It is not an accurate measure of purchasing power.
D. It is the same as your real income in times of high inflation.
24. The amount of money income received in a given time period, measured in
current dollars, is
A. Nominal income.
B. Real income.
C. Relative income.
D. The Consumer Price Index.
25. The term "nominal income" refers to
A. Money income adjusted for any change in the price level.
B. Real purchasing power.
C. Real purchasing power deflated for rising prices.
D. Money income measured in current dollars.

26. Real income is
A. Nominal income adjusted for inflation.
B. The amount of money income received in a given time period, measured in

current dollars.
C. The use of nominal dollars to gauge changes in income.
27. Income in constant prices is
A. Nominal income.
B. Real income.
C. Bracket creep.
D. Income effect.
28. Your real income is
A. The amount of money you receive during a given time period.
B. Measured in current dollars.
C. The purchasing power of the money you receive.
D. The same as your nominal income in times of high inflation.

29. Inflation ________________ the purchasing power of money.
A. increases
B. decreases
C. does not affect
D. stabilizes
30. When the price of a product rises faster than the inflation rate,
A. Nominal incomes of the users of that product fall.
B. Users of that product have higher real incomes than people who do not use
the product.
C. Nominal incomes of the users of that product rise.
D. Real incomes of the users of that product fall.
31. If your rent increases from $1,000 to $1,100 over a period of one year and your
income rises from $6,000 to $7,000, your nominal income has
A. Increased, but your real income has decreased.
B. Increased, and your real income has increased.
C. Decreased, and your real income has decreased.
D. Increased, but your real income has remained the same.

32. If the price of your cell phone service increases from $70 to $105 over a period
of one year and your income rises from $1,500 to $1,525, your nominal income
has
A. Increased, and your real income has increased.
B. Increased, but your real income has decreased.
33. If your gasoline purchases decrease from $150 per month to $80 over a period
of one year due to lower prices and your income decreases from $1,600 per
month to $1,500 per month, your nominal income has
B. Decreased, but your real income has increased.
C. Increased, and your real income has increased.
34. If a bank has already lent money at fixed interest rates, then during a period of
higher-than-expected inflation, it experiences
A. Negative real income effects.
B. Hyperinflation.
C. Rising real interest rates.
D. Deflation.
35. If deflation is 0.5 percent per year and you receive a 1 percent decrease in
your salary, then your
A. Real income falls, but your nominal income remains unchanged.
B. Real and nominal income both fall.
C. Real income remains unchanged, but your nominal income rises.
D. Real and nominal income both rise.
36. Which of the following groups is protected from a sudden increase in

inflation?
A. Borrowers who have loans at fixed interest rates.
B. Fixed-income groups.
C. Workers who receive fixed wages under multiyear contracts.
D. People who rent their homes under short-term leases in comparison with
those who own their homes.
37. Which of the following is a microeconomic consequence of inflation?
A. Greater unemployment.
B. Greater real income.
C. The wealth effect.

38. Generally speaking, which of the following groups would tend to gain real
income from the wealth effects of inflation?
A. People with fixed income.
B. People who have passbook savings accounts at fixed rates of interest.
C. People who own assets that are appreciating faster than the inflation rate.
D. People who hold all of their assets in the form of cash.
39. During a period of unanticipated inflation,
A. Debtors are better off and creditors are worse off.
B. Debtors and creditors are both better off because of lower real interest
rates.
C. Individuals on fixed incomes are better off.
D. All individuals are worse off because of the level of uncertainty.

40.
According to Figure 7.3, prices and wages were rising, so
A. Sellers of output were better off than wage earners.
B. Everyone must have been worse off since the price level rose faster than
incomes.
C. There were no redistributive effects of inflation.
D. The economy was experiencing stagflation.

41.
During the time period represented in Figure 7.3, the purchasing power of the
average worker
A. Increased because nominal wages increased.
B. Decreased because real income decreased.
C. Stay the same because COLAs probably kept purchasing power

approximately constant.
D. Decreased because nominal income decreased.

42. Money illusion is the
A. Use of nominal dollars rather than real dollars to gauge income or wealth.
B. Movement of taxpayers into higher tax brackets as nominal income

increases.
C. Focus on real dollars rather than nominal dollars to determine purchasing

power.
D. Uncertainty that occurs because of inflation.
43. A friend tells you that his income has risen every year by 5 percent. At the
same time, prices, on average, have risen by 5 percent. Your friend claims he
is better off. Your friend
A. Is experiencing money illusion.
B. Really is better off as he suggests.
C. Has experienced an increase in nominal and real income.
D. Has experienced an increase in real income only.
44. When people make decisions on the basis of the face value of currency rather
than the real value, their decisions reflect
A. The price effect of inflation.
B. The income effect of inflation.
C. The wealth effect of inflation.
D. Money illusion.
45. All of the following are macroeconomic effects of inflation except
A. Uncertainty.
B. Speculation.
C. Bracket creep.
D. Lower taxes.
46. All of the following push a country inside its production possibilities curve
except
A. A sudden burst of inflation that has not been anticipated.
B. A sudden burst of deflation that has not been anticipated.
C. The withholding of resources from the production process because of

speculation.
D. An increase in labor force participation.
47. Which of the following is a macro consequence of a sudden increase in the

average level of prices?
A. People on fixed incomes suffer.
B. Uncertainty is greater.
C. Nominal income falls by a smaller percentage than real income.
D. People lengthen their time horizons.

48. Inflation affects production decisions because it
A. Decreases input costs.
B. Reduces speculation.
C. Causes businesses to focus more on the future.
D. Causes businesses to be more cautious since the future is uncertain.
49. The uncertainty that results from inflation causes changes in
A. Consumption, saving, and investment behavior.
B. Saving and investment behavior, but not consumption.
C. Consumption, but not saving and investment behavior.
D. Income, but not consumption.
50. Hyperinflation is
A. An inflation rate in excess of 200 percent, lasting at least one year.
B. An inflation rate in excess of 20 percent, lasting at least one year.
C. A common problem in the United States.
D. The movement of taxpayers to higher tax brackets because of rising prices.

51. Which of the following is a likely macroeconomic consequence of inflation?
A. Focus on long-term planning.
B. Speculation.
C. Antitrust issues.
52. Speculation during periods of inflation can result in all of the following except
A. People buying resources for resale later, rather than using the resources for
current production.
B. A movement inside the production possibilities curve.
C. People buying gold, silver, jewelry, and the like instead of capital for
production.
D. More resources going into the production process.
53. The movement of taxpayers into higher tax brackets as nominal incomes grow
is
A. Bracket leap.
B. Bracket hike.
C. Bracket creep.
D. Inflation hike.
54. Last year you earned $20,000 and paid taxes in the second tax bracket at 15
percent. This year you earned $25,000, the extra $5,000 just compensating you
for inflation. However, this year you paid taxes in the third bracket at 20
percent. This illustrates the concept of
A. Stagflation.
B. Speculation.
C. Deflation.
D. Bracket creep.
55. During a period of deflation,
A. The price level rises.
B. People on fixed incomes are better off.
C. People who hold cash are worse off.
D. Lenders are worse off.
56. If the price level is falling, all of the following are true except
A. Lenders are better off.
B. Businesses are reluctant to borrow money.
C. Purchasing power increases.
D. Borrowers are not affected.

A. Time horizons are longer.
B. Consumer confidence increases.
C. Lenders are better off.
D. Borrowers are better off.
58. The Consumer Price Index is
A. A measure of changes in the average price of all goods and services.
B. A measure of changes in the average price of consumer goods and services.
C. Used to measure the impact of business speculation on consumers.
D. The impact felt by consumers who move into a higher tax bracket because
of inflation.
59. Which of the following measures changes in the average price of consumer
goods and services?
A. Inflation rate.
B. CPI.
C. Deflation rate.
D. Market basket.
60. To construct the Consumer Price Index, the Bureau of Labor Statistics must
A. Find out what people buy with their incomes and how the prices of what
they buy change.
B. Find out why people buy, what they buy, and how the prices of what they
buy change.
C. Find out what is in the typical consumer market basket on the basis of what
producers produce.
D. Conduct producer surveys to determine how much prices rise.
61. To compute the real income of a household, the index that should be used is
the
A. Producer Price Index (PPI).
B. Consumer Price Index (CPI).
C. GDP deflator.
D. Cost of Living Adjustment (COLA).
62. The inflation rate is the
A. Monthly percentage rate increase in the price of all goods and services.
B. Annual percentage rate increase in tax brackets.
C. Annual percentage rate increase in the average price level.
D. Monthly adjustment of wages to the cost of living.

63. A sudden increase in inflation, ceteris paribus,
A. Raises the real income of lenders relative to borrowers.
B. Raises the CPI and reduces real income.
C. Reduces the nominal income of those who have constant real incomes.
D. Makes everyone worse off.
64. Assume the CPI increases from 110 to 121, and Manny's nominal income
increases from $100,000 to $120,000 over the same period. Manny's real
income has
A. Increased by approximately 12 percent.
B. Increased by approximately 9 percent.
C. Decreased by approximately 8 percent.
D. Remained the same.
65. If the CPI increases from 110 to 125 for one year, the rate of inflation for that
year is
A. 15 percent.
B. 13.6 percent.
C. 1.13 percent.
D. 50 percent.
66. If the CPI increases from 250 to 275 for one year, the rate of inflation for that
year is
A. 13 percent.
B. 10 percent.
C. 25 percent.
D. 15 percent.
67. At the beginning of 2006 the CPI was 216.2. At the beginning of 2007, it was
225.1. What was the rate of inflation in 2006?
A. 4.9 percent.
B. 4.1 percent.
C. 3.6 percent.
D. 8.9 percent.
68. At the beginning of 2000, the CPI was 159.3. At the beginning of 2001, it was
177.6. What was the approximate rate of inflation in 2000?
A. 7.6 percent.
B. 18.3 percent.
C. 10.0 percent.
D. 11.5 percent.
69. If the Consumer Price Index rose from 180.9 in 2005 to 418.5 in 2015, what is
the total percentage change in prices over this 10-year period?
A. 131.34 percent.
B. 18.5 percent.
C. 80.9 percent.
D. 127.21 percent.
70. If a price index changed from 150 in 2008 to 148.5 in 2009, while Jim Bob's
nominal wage fell from $25 to $24, then Jim Bob is
A. Better off like everyone else in the economy since prices are lower for
consumers.
B. Neither better nor worse off since his real wage remained constant.
C. Better off since his nominal wage fell slower than the price level did.
D. Worse off since his nominal wage fell faster than the price level did.
71. For the CPI, the market basket is expressed in terms of what the goods cost
in
A. 1929.
B. 2000.
C. The base period.
D. The optimal period.

72. The base period is the
A. Time period used for comparative analysis.
B. Absence of significant changes in the average price level.
C. Time period when full employment is reached.
D. First year in which inflation figures were calculated.
73. The base period used in computing a price index is
A. The year in which prices were at their lowest level.
B. The year in which prices were at their average level.
C. A fixed reference year from which meaningful comparisons can be made.
D. The earliest year for which data are available.
74. Item weight is the
A. Measure of how much consumers demand a particular item.
B. Percentage of the typical consumer budget spent on the item.
C. Significance placed on a particular item by the wealthiest households.
D. Physical weight of a good or service.

75. The percentage of total expenditure spent on a specific product is called
A. Core inflation.
B. A market basket.
C. A budget.
D. The item weight.
76. The Producer Price Index (PPI) is the best index to measure average price
changes faced by
A. Consumers.
B. Producers.
C. Importers.
D. Labor unions negotiating COLAs.
77. If you were interested in charting prices of resources used by producers of

energy, which of the following would you use?
A. The Producer Price Index (PPI).
B. The Consumer Price Index (CPI).
C. The GDP deflator.
D. The Cost of Living Adjustment (COLA).

78. Which of the following is often watched closely as a clue to potential changes
in consumer prices in the future?
A. The CPI.
B. The PPI.
D. The COLAs.
79. The GDP deflator
A. Is the price index based on a fixed basket of goods and services for the
government.
B. Is the best measure of inflation for consumers.
C. Reflects the price changes felt by producers but not consumers.
D. Is the broadest price index, covering all output.
80. The price index that refers to all final goods and services produced in a
country is the
A. GDP deflator.
B. PPI.
C. CPI.
D. GDP inflator.
81. Which of the following is not true for the GDP deflator?
A. It is based on a fixed basket of goods and services.
B. It refers to all goods and services produced in GDP.
C. It typically reveals a lower inflation rate than the CPI.
D. It reflects both price changes and market responses.
82. At the beginning of 1989, the GDP deflator was 93.6. At the end of 2004, it was
189.2. What was the total percentage change in prices over this 15-year
period?
A. 98.9 percent.
B. 102.14 percent.
C. 59.6 percent.
D. 150.0 percent.
83. The best price index to use in calculating real GDP is
A. Any of the indexes because they all reflect price level changes.
B. The CPI.
C. The PPI.
D. The GDP deflator.

84. Which of the following reflects changes in expenditure patterns as well as
price changes?
A. The CPI.
B. The PPI.
D. The COLA.
85. Nominal GDP is the
A. Price index that refers to all goods and services included in GDP.
B. Value of final output produced using American-owned factors of production.
C. Value of final output produced, measured in current prices.
D. Value of final output produced, adjusted for changing prices.
86. Real GDP is the
A. Value of final output produced, adjusted for changing prices.
B. Value of final output produced, measured in current prices.
C. Income earned by current factors of production.
D. GDP minus depreciation.

87. If nominal GDP is constant, then the GDP deflator varies inversely with
A. The unemployment rate.
B. Real GDP.
C. COLAs.
D. The CPI.
88. If nominal GDP is $9,600 billion and the GDP deflator is 118.5, real GDP is
A. $6,586.7 billion.
B. $10,852.7 billion.
C. $3,657.0 billion.
D. $8,101.3 billion.
89.
Based on Table 7.1, the rate of inflation between 2002 and 2003 using the CPI
was
A. 1.5 percent.
B. 2.2 percent.
C. 6.2 percent.
D. 4.1 percent.
90.
Based on Table 7.1, the rate of inflation between 2003 and 2004, using the
GDP deflator, was
A. 2.4 percent.
B. 2.9 percent.
C. 6.2 percent.
D. 4.1 percent.
91.
Based on Table 7.1, the real GDP for 2003 was
B. $6,811.7 billion.
92.
93.
Based on Table 7.2, the rate of inflation between 2001 and 2002 using the CPI
was
A. 2.65 percent.
B. 2.58 percent.
C. 3.40 percent.
D. 2.02 percent.
94.
GDP deflator, was
A. 1.62 percent.
B. 2.68 percent.
C. 4.91 percent.

95.
96.
97. In the Full Employment and Balanced Growth Act of 1978, price stability
means that
A. There is zero inflation each year.
B. Inflation is less than 5 percent per year.
C. The inflation rate is the same each year.
D. Inflation is less than 3 percent per year.
98. If some specific prices fall, some relative prices rise, and average prices
remain unchanged, there has been a period of
A. Stable price levels.
B. Inflation.
C. Deflation.
D. Disinflation.
99. In the Full Employment and Balanced Growth Act of 1978,
A. Congress set an inflation goal of no more than 3 percent.
B. The president set an inflation goal of 0 percent.
C. Alan Greenspan set an inflation goal of 0 percent.
D. An unemployment goal of 4 percent was set, but no inflation goal could be

set.
100.Price stability
A. Is defined as a 0 percent rate of inflation in the Full Employment and

Balanced Growth Act of 1978.
B. Is targeted at a 3 percent rate of inflation by Alan Greenspan, the head of

the Federal Reserve.
C. Has been officially set by Congress at 3 percent or less.
D. Has been achieved consistently in the 20th century in the United States.
101.An inflation goal set at a low rate but greater than zero allows all of the
following except
A. The economy to achieve both full employment and price stability at the
same time.
B. For errors because of new products.
C. For price increases caused by quality improvements.
D. The Fed to meet less often.
102.If the CPI doesn't measure product quality improvements, the CPI tends to
A. Understate the inflation rate.
B. Overstate the inflation rate.
C. Understate economic growth.
D. Be artificially low.
103.Which one of the following statements about the United States is true?
A. Prior to World War II, the United States experienced periods of both
deflation and inflation.
B. The United States has experienced inflation virtually every year since 1800.
C. Since World War II, the United States has experienced deflation.
D. Prior to World War II, the United States experienced deflation virtually
every year; since World War II, the United States has consistently
experienced inflation.
104.All of the following statements about inflation in the United States are correct
except
A. Since the Great Depression, average prices have risen almost every year.
B. The inflation rate was 13.5 percent in 1980.
C. Prior to World War II, the United States experienced periods of both
D. Inflation was at its worst during the Great Depression.

105.If consumers attempt to buy more goods than the economy can produce, the
result is
A. Unemployment.
B. Demand-pull inflation.
C. Cost-push inflation.
D. The wealth effect.
106.If the economy is producing at capacity and consumers are willing and able to
buy more, this may cause
A. Demand-pull inflation.
B. Cost-push inflation.
C. Supply-side inflation.
D. The price effect.
107.When natural disasters, such as hurricanes on the U.S. Gulf Coast or an

earthquake in Japan, disrupt supply chains and push up the costs of
production, this may result in
A. Labor-push inflation.
C. Wage-pull inflation.
D. Cost-push inflation.
108.When production costs increase and producers raise output prices, the result
is
A. The price effect.
B. Unemployment.
D. Demand-pull inflation.
109.If OPEC raises the price of oil and production costs increase, this may cause
A. Cost-push inflation.
C. Hyperinflation.
D. Super-pull inflation.
110.A COLA is
A. A mortgage that adjusts the nominal interest rate to changing rates of

inflation.
B. A price index that refers to all goods and services included in GDP.
C. An automatic adjustment of nominal income to the rate of inflation.
D. An inflation rate of at least 200 percent, lasting more than one year.
111.Cost-of-living adjustments
A. Reduce the price effect of inflation.
B. Allow individuals to maintain their purchasing power during inflation.
C. Cause individuals to shorten their time horizons.
D. Maintain constant real interest rates.
112.A mortgage that adjusts the nominal interest rate to changing rates of
inflation is
A. An ARM.
B. A PPI.
C. A GDM.
D. A COLA.
113.When inflation suddenly increases, ARMs
A. Protect against rising real interest rates.
B. Protect the purchasing power of workers' wages.
C. Protect borrowers against the effects of inflation.
D. Maintain a stable real interest rate.

114.The real interest rate is
A. The difference between the prime rate and the rate charged by the
government (the Federal Reserve) on loans.
B. The nominal interest rate minus the anticipated rate of inflation.
C. The inflation rate minus the percentage increase in average wages.
D. The sum of inflation rates and unemployment rates.
115.All of the following are true of the real interest rate except it
A. Is equal to the nominal interest rate minus the anticipated rate of inflation.
B. Is stabilized by ARMs.
C. Is the inflation-adjusted rate of interest.
D. Equals the foreign exchange rate minus the inflation rate.
116.If the nominal interest rate is 13 percent and the anticipated rate of inflation
is 8 percent, the real interest rate is
A. 13 percent.
B. 21 percent.
C. 5 percent.
D. -5 percent.
117.If the nominal interest rate is 6 percent and the anticipated rate of inflation is
6 percent, the real interest rate is
A. 6 percent.
B. 12 percent.
C. 3 percent.
D. 0 percent.
118.If the nominal interest rate is 10 percent and the real interest rate is 6
percent,
A. The expected rate of inflation is 4 percent.
B. The expected rate of inflation is 6 percent.
C. Real GDP must exceed nominal GDP.
D. Nominal GDP equals real GDP.

119.
Using Figure 7.4, expected inflation was
A. Greater during the period from 1970 to 1975 than it was during the period
from 1980 to 1985.
B. The same in 1970 and 1995.
C. Greater in 1970 than in 1995.
D. Greater during the period from 1980 to 1985 than it was during the period
from 1970 to 1975.
120.
For the economy represented in Figure 7.4, which of the following statements
is definitely true?
A. Anticipated inflation was greater than actual inflation.
B. Actual inflation was greater than anticipated inflation.
C. Inflation was anticipated.
D. Inflation occurred.
121.
Consider the economy represented in Figure 7.4. If actual inflation was

greater than anticipated inflation,
A. Borrowers would experience a decrease in real income.
B. Lenders would experience a decrease in real income.
C. Lenders would experience an increase in real income.
D. The Federal Reserve would be forced to step in to increase lending.

122.The most fundamental function of prices in a market economy is to provide
A. The data necessary to calculate rates of inflation.
B. The basis for the calculation of sales tax.
C. Information about the relative scarcities of resources and goods and

services.
D. Maximum profits to producers.
123.The most desirable inflation rate is the rate that
A. Equals the official goal of 3 percent.
B. Has the least effect on the behavior of companies, investors, consumers,

and workers.
C. Maximizes the "wealth effect" of inflation.
D. Coincides with an unemployment rate of 0 percent.
124.The amount of money income received in a given time period, measured in

current dollars, is
A. Nominal income.
B. Fixed income.
C. Real income.
D. Asset income.
125.If your nominal income rises faster than the price level,
A. Your real income has fallen.
B. Your real income has risen.
C. You can buy fewer goods and services.
D. There must be deflation.
126.According to the text, which group of assets increased the most in

percentage terms from 1991 to 2001?
A. Housing.
B. Gold.
C. Stocks.
D. Bonds.
127.All of the following are detrimental macro consequences of inflation except
A. Uncertainty.
B. Speculation.
C. Bracket creep.
D. COLAs.
128.Which of the following indexes tracks changes in the average prices paid by
consumers?
A. CPI.
B. PPI.
C. GDP deflator.
D. The market basket.
129.If your nominal income remains constant at $3,000 while the price of an
important product in your budget, such as cell phone service, rises from $50
to $100, your real income has
A. Decreased by $50.
B. Decreased by $100.
C. Decreased by $150.
D. Remained constant.
130.The core inflation rate excludes
A. Entertainment and packaging prices.
B. Food and energy prices.
C. Only energy prices for the airlines.
D. Import prices.
131.The most visible consequence of inflation is
A. A rise in employment.
B. A rise in production.
C. A rise in the price level.
D. A change in government regulation.
132.Changes in relative prices may occur
A. Only in periods of stable prices.
B. Only in periods of inflation or deflation.
C. In periods of stable prices or in periods of inflation or deflation.
D. In none of the other choices.
True / False Questions
133.Inflation is an increase in the average level of prices of goods and services.
True False
134.Relative price changes are a desirable and essential ingredient of the market
mechanism.
True False
135.When restaurant prices rise faster than prices of food at grocery stores, real
income rises for people who visit restaurants relative to those who cook for
themselves.
True False
136.If your real income rises but your nominal income falls, then you benefit from
deflation.
True False
137.Redistribution of wealth is a microeconomic effect of inflation.
True False
138.Money illusion results from expectations based on real purchasing power

rather than current nominal income.
True False
139.Uncertainty and speculation are microeconomic effects of inflation.
True False
140.The undesirable effects of bracket creep can be eliminated by indexing
marginal tax rates.
True False
141.The CPI is a measure of changes in the average price of consumer goods and
services.
True False
142.The core inflation rate involves all price changes including food and energy.
True False
143.If the average price level increases by 2 percent this year, price stability has
been achieved.
True False
144.In order to achieve price stability, inflation must be zero.
True False
145.Demand-pull inflation is the result of excessive pressure on the demand side

of the economy.
True False
146.Cost-push inflation can occur as the result of higher wage rates.
True False
147.The real interest rate is the rate of inflation minus the nominal interest rate.
True False
Essay Questions
148.During a period of inflation, are all prices rising? Explain your answer.
149.Is everyone worse off because of inflation? Why or why not?
150.Why did the Full Employment and Balanced Growth Act establish 3 percent
inflation as the benchmark rather than zero inflation?
151.What is the difference between demand-pull inflation and cost-push

inflation?
152.Discuss two mechanisms that offer protection from the effects of inflation.
153.Based on the real interest rate, who tends to benefit from unanticipated
inflation in terms of borrowing and lending?
Chapter 07 Inflation Answer Key
Multiple Choice Questions
1. Inflation is
A. A rise in the price of every good but not any service.
B. An increase in relative prices of all goods and services.
C. A situation in which purchasing power increases.
D. An increase in the average level of prices of goods and services.
Inflation does not mean that all prices of goods and services are rising.
Rather, it means the average price of all goods and services is rising.
AACSB: Reflective Thinking

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-01 How inflation is measured.
Topic: WHAT IS INFLATION?
2. Inflation rates above 10 percent rarely occur
A. In most countries today.
B. In the United States.
C. During wartime periods.
In recent years inflation over 10 percent per year has been confined to only
a handful of countries such as Zimbabwe and Venezuela.

Blooms: Understand
Difficulty: 1 Easy
3. Inflation means
A. Specific prices are rising, and relative prices are falling.
B. Both relative prices and average prices are rising.
C. Relative prices are rising, but it is not certain what is happening to

average prices.
D. Average prices are rising, but it is not certain what is happening to

relative prices.
The relative price of a good or service can rise or fall depending on if it is

rising faster than inflation or slower than inflation.

Blooms: Remember
Difficulty: 1 Easy
4. A decrease in the average level of prices of goods and services is
A. Deflation.
B. Recession.
C. Depression.
D. Inflation.
Deflation does not mean that all prices are necessarily falling, but on
average prices are falling.

Blooms: Remember
Difficulty: 1 Easy
5. Deflation is a/an ____________ in the average level of prices of goods and
services.
A. increase
B. decrease
C. stagnation
D. increase followed by a decrease
With deflation, even though the price level may be falling, some prices may
be rising or remaining constant.

Blooms: Remember
Difficulty: 1 Easy
6. When there is no deflation or inflation,
A. Prices of all goods change by the same percentage.
B. Relative prices remain unchanged.
C. Average prices do not change.
D. Full employment is achieved.
Some prices may rise or fall, but on average prices are constant.

Blooms: Remember
Difficulty: 2 Medium
7.
According to Figure 7.1 in Country A,
A. Relative prices may have been changing, but average prices were
constant.
B. Relative prices were definitely constant.
C. Average prices and relative prices were definitely changing.
D. Average prices were constant, and unemployment was increasing.
As the textbook will later explain in great detail, many forces in both the
private sector and public sector affect the price level. In this case, the
forces were balanced, and the price level was stable.
AACSB: Analytic
Blooms: Analyze
8.
According to Figure 7.1, which of the following statements was definitely

true about Country B?
A. Relative prices were changing.
B. The price level in general increased over the time period 1970 to 1995.
C. Real incomes were increasing.
D. The price level was about the same in 1970 and 1995.
When the percentage change in the CPI is positive each year, there may or
may not be changes in relative prices. But there must be increases in
average prices.
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
9.
During the time period represented in Figure 7.1, Country A
A. Experienced periods of both inflation and deflation.
B. Never achieved the inflation goal set by the Full Employment and
C. Had no need for COLAs.
D. Experienced only inflation.
Since the CPI remained constant, the cost of living also remained constant;
therefore there was no need for COLAs.
AACSB: Analytic
Blooms: Analyze
10.
In the year 1995, which of the following statements is true about the two
countries represented in Figure 7.2?
A. The countries had approximately the same rate of inflation.
B. The CPI was virtually equal in the two countries.
C. The market basket cost approximately the same in both countries.
D. Real incomes were rising at the same rate in both countries.
In the year 1995, the two countries' CPI increased by approximately 2

percent (where the two curves intersect).
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
11. Relative price is
A. The price of one good in comparison with the price of other goods.
B. A decrease in purchasing power because of rising prices.
C. The amount of income a particular good requires.
D. The current price paid for a good or service.
If the price of an apple is $1 and the price of a banana is $0.50, then the
relative price of an apple is two bananas.

Blooms: Remember
Difficulty: 1 Easy
12. Changes in relative prices may occur in a period of
A. Stable prices only.
B. Inflation only.
C. Deflation only.
D. Stable prices, inflation, or deflation.
Changes in relative prices have little to do with inflation and are influenced
by things like production costs and changes in relative demand for the
goods.

Blooms: Understand
13. Changes in the relative prices of two goods indicate
A. Inflation.
B. Nominal price changes adjusted for the inflation in the price of the
goods.
C. That average prices for the period must not be stable.
D. Changes in the desired mix of output.
The relative price of a good is the price in terms of other goods. If the price
of a cola is $1 and the price of a pizza is $5, the relative price of a pizza in
terms of colas is the price of pizza divided by the price of colas. That is, one
pizza costs five colas.

Blooms: Understand
Difficulty: 1 Easy
14. Which of the following functions are performed by changes in relative prices
but not by changes in average prices?
A. Computing real income from nominal income.
B. Indicating an overheating economy.
C. Signaling changes in the desired mix of output.
D. Measuring the rates of inflation.
If the relative price of a good rises, this demand signals for producers to
bring more of that good to the market because they will be rewarded by a
higher price.
AACSB: Analytic
Blooms: Apply
15. If the price of iPods rises 10 percent during a year when the level of average
prices rises 3 percent, the relative price of iPods compared with other
goods
B. Increases.
C. Decreases.
When the price of a good rises faster than the average price level or falls
more slowly than the average price level, it is increasing in relative price.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
16. If the price of Bluetooth headsets rises 12 percent during a year when the
level of average prices rises 13 percent, the relative price of Bluetooth
headsets
B. Increases.
C. Decreases.
When the price of a good increases at a slower rate than the average price
level, the relative price of the good decreases.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
17. When the price of a good decreases more slowly than an index of average
prices decreases, the good's relative price
A. Has risen while its absolute price has fallen.
B. And its absolute price have risen.
C. And its absolute price have fallen.
D. Has fallen while its absolute price has risen.
If the price of a good rises more quickly than the average price level or falls
more slowly than the average price level, its relative price has increased.

Blooms: Understand
18. Comparing changes in relative prices is more useful than examining average
prices in
A. Determining the redistribution of income.
B. Determining the inflation rate.
C. Deflating nominal income.
D. Determining if there is deflation.
Income will tend to be redistributed to those selling goods that have

increased in relative price.

Blooms: Understand
Difficulty: 1 Easy
19. Which of the following explains why redistribution occurs during inflation?
A. Rising prices fail to signal desirable changes in the mix of output.
B. Because all prices do not change at the same rate, people buy different
combinations of goods and services and own different combinations of
wealth.
C. Relative prices remain unchanged.
D. All loans are indexed to inflation.
For example, some forms of wealth, like stocks, have appreciated faster
than other forms of wealth such as silver.

Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 07-02 Why inflation is a socioeconomic problem.
Topic: REDISTRIBUTIVE EFFECTS OF INFLATION
20. Which of the following results from unexpected increases in the rate of
inflation?
A. Decreased uncertainty.
B. Increased windfall profits to creditors who have lent large amounts of

money.
C. Redistributions of income and wealth between different groups.
D. Creditors are made better off.
Unless all parties protect themselves from the effects of changes in the
price level by using COLAs, there will be redistribution of income.

Blooms: Understand
Difficulty: 1 Easy
21. The redistributive mechanics of inflation include all of the following except
A. Price effects.
B. Income effects.
C. Wealth effects.
D. Output effects.
Redistribution occurs because different people buy and sell different goods
and own different assets.

Blooms: Remember
22. All of the following are microeconomic consequences of inflation except
A. A price effect.
B. An income effect.
C. A wealth effect.
D. A profit effect.
Prices, incomes, and wealth change due to changes in inflation, while profit
is based more on the difference in revenue and cost, and there is no profit
effect.

Blooms: Understand
23. Which of the following is not true about your nominal income?
A. It is the amount of money you receive during a given time period.
B. It is measured in current dollars.
C. It is not an accurate measure of purchasing power.
D. It is the same as your real income in times of high inflation.
Real income is a measure of the quantity of goods and services your dollars
will buy, and your nominal income is the amount of money you receive in a
particular time period.

Blooms: Understand
current dollars, is
A. Nominal income.
B. Real income.
C. Relative income.
D. The Consumer Price Index.
Nominal income is based in today's dollars but is less helpful in determining

the actual amount of goods and services it can purchase.

Blooms: Remember
Difficulty: 1 Easy
25. The term "nominal income" refers to
A. Money income adjusted for any change in the price level.
B. Real purchasing power.
C. Real purchasing power deflated for rising prices.
D. Money income measured in current dollars.
Income received today in today's dollars, otherwise not adjusted for

inflation, is nominal income.

Blooms: Remember
Difficulty: 1 Easy
26. Real income is
A. Nominal income adjusted for inflation.
B. The amount of money income received in a given time period, measured

in current dollars.
C. The use of nominal dollars to gauge changes in income.
Real income takes into account changes to the price level, so it is a much
better guide to how much your income will purchase in goods and services.

Blooms: Remember
Difficulty: 1 Easy
27. Income in constant prices is
A. Nominal income.
B. Real income.
C. Bracket creep.
D. Income effect.
It is easier to keep track of what your money will purchase when using real
variables such as real income.

Blooms: Remember
Difficulty: 1 Easy
28. Your real income is
A. The amount of money you receive during a given time period.
B. Measured in current dollars.
C. The purchasing power of the money you receive.
D. The same as your nominal income in times of high inflation.
Real income is a measure of how much your income will allow you to
purchase in goods and services.

Blooms: Understand
Difficulty: 1 Easy
29. Inflation ________________ the purchasing power of money.
A. increases
B. decreases
C. does not affect
D. stabilizes
Since inflation increases the prices of goods and services on average, it

reduces the purchasing power of money.

Blooms: Remember
Difficulty: 1 Easy
30. When the price of a product rises faster than the inflation rate,
A. Nominal incomes of the users of that product fall.
B. Users of that product have higher real incomes than people who do not
use the product.
C. Nominal incomes of the users of that product rise.
D. Real incomes of the users of that product fall.
Because the income of consumers of the products whose prices are rising
faster than the inflation rate will not buy as many goods and services, the
real income of these consumers will fall. At the same time, the real income
of the sellers of those products rises.

Blooms: Understand
Difficulty: 1 Easy
31. If your rent increases from $1,000 to $1,100 over a period of one year and
your income rises from $6,000 to $7,000, your nominal income has
B. Increased, and your real income has increased.
You are actually earning more nominal income, and even after adjusting for
changes in prices, particularly rent, your real income will still be higher.
Your income is increasing roughly 17 percent while your rent is increasing
only 10 percent.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
32. If the price of your cell phone service increases from $70 to $105 over a
period of one year and your income rises from $1,500 to $1,525, your
nominal income has
A. Increased, and your real income has increased.
B. Increased, but your real income has decreased.
Prices, particularly cell phone service, are rising faster than incomes; so
while nominal income will be higher, real income will be lower. In this case,
your income rose 1.67 percent while the price of cell phone service
increased 50 percent.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
33. If your gasoline purchases decrease from $150 per month to $80 over a
period of one year due to lower prices and your income decreases from
$1,600 per month to $1,500 per month, your nominal income has
B. Decreased, but your real income has increased.
C. Increased, and your real income has increased.
Your nominal income has decreased (6.3 percent), but prices, particularly
for gasoline, have fallen faster (46.7 percent), leading you to have lower
nominal income but higher real income.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
34. If a bank has already lent money at fixed interest rates, then during a period
of higher-than-expected inflation, it experiences
A. Negative real income effects.
B. Hyperinflation.
C. Rising real interest rates.
D. Deflation.
The lender loses because the borrower repays the fixed-interest loan with
dollars worth less (in real terms) than the dollars borrowed.

Blooms: Understand
Difficulty: 1 Easy
35. If deflation is 0.5 percent per year and you receive a 1 percent decrease in
your salary, then your
A. Real income falls, but your nominal income remains unchanged.
B. Real and nominal income both fall.
C. Real income remains unchanged, but your nominal income rises.
D. Real and nominal income both rise.
In this case, your nominal income has fallen faster than the price level has
fallen, leading you to have less real income as well.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
36. Which of the following groups is protected from a sudden increase in
inflation?
A. Borrowers who have loans at fixed interest rates.
B. Fixed-income groups.
C. Workers who receive fixed wages under multiyear contracts.
D. People who rent their homes under short-term leases in comparison with
those who own their homes.
When inflation increases, borrowers end up paying fixed-interest loans with

money that is worth less than what they borrowed.

Blooms: Understand
Difficulty: 1 Easy
37. Which of the following is a microeconomic consequence of inflation?
A. Greater unemployment.
B. Greater real income.
C. The wealth effect.
People's allocation of wealth will have a huge impact on whether they are
helped or harmed by inflation.

Blooms: Remember
Difficulty: 1 Easy
38. Generally speaking, which of the following groups would tend to gain real
income from the wealth effects of inflation?
A. People with fixed income.
B. People who have passbook savings accounts at fixed rates of interest.
C. People who own assets that are appreciating faster than the inflation
rate.
D. People who hold all of their assets in the form of cash.
Some assets, like stocks, tend to appreciate faster than the price level,
while money market accounts typically appreciate at a slower rate than the
price level.
AACSB: Analytic
Blooms: Apply
39. During a period of unanticipated inflation,
A. Debtors are better off and creditors are worse off.
B. Debtors and creditors are both better off because of lower real interest
rates.
C. Individuals on fixed incomes are better off.
D. All individuals are worse off because of the level of uncertainty.
If neither party anticipates inflation, then borrowers win because they repay
lenders with money that is less valuable than what they borrowed.
AACSB: Analytic
Blooms: Apply
40.
According to Figure 7.3, prices and wages were rising, so
A. Sellers of output were better off than wage earners.
B. Everyone must have been worse off since the price level rose faster than
incomes.
C. There were no redistributive effects of inflation.
D. The economy was experiencing stagflation.
Since prices were rising faster than wages, the sellers of final output were
gaining at the expense of the workers that made the product or service that
was sold.
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
41.
During the time period represented in Figure 7.3, the purchasing power of
the average worker
A. Increased because nominal wages increased.
B. Decreased because real income decreased.
C. Stay the same because COLAs probably kept purchasing power

approximately constant.
D. Decreased because nominal income decreased.
The price level was actually rising faster than nominal wages over the same
period, so real income would be lower.
AACSB: Analytic
Blooms: Analyze
42. Money illusion is the
A. Use of nominal dollars rather than real dollars to gauge income or

wealth.
B. Movement of taxpayers into higher tax brackets as nominal income

increases.
C. Focus on real dollars rather than nominal dollars to determine

purchasing power.
D. Uncertainty that occurs because of inflation.
If your income doubles and the price level doubles but you feel better off,
then you are experiencing money illusion.

Blooms: Remember
Difficulty: 1 Easy
43. A friend tells you that his income has risen every year by 5 percent. At the
same time, prices, on average, have risen by 5 percent. Your friend claims
he is better off. Your friend
A. Is experiencing money illusion.
B. Really is better off as he suggests.
C. Has experienced an increase in nominal and real income.
D. Has experienced an increase in real income only.
Since your friend is using only nominal income to determine if he's better
off and his real income is remaining constant, he is experiencing money
illusion.
AACSB: Analytic
Blooms: Apply
44. When people make decisions on the basis of the face value of currency
rather than the real value, their decisions reflect
A. The price effect of inflation.
B. The income effect of inflation.
C. The wealth effect of inflation.
D. Money illusion.
We should measure our benefit in terms of real income because that tells
us how much our income purchases in goods and services.

Blooms: Understand
45. All of the following are macroeconomic effects of inflation except
A. Uncertainty.
B. Speculation.
C. Bracket creep.
D. Lower taxes.
Taxes will typically rise with inflation due to bracket creep unless the
brackets are adjusted for inflation.

Blooms: Understand
Topic: MACRO CONSEQUENCES
46. All of the following push a country inside its production possibilities curve
except
A. A sudden burst of inflation that has not been anticipated.
B. A sudden burst of deflation that has not been anticipated.
C. The withholding of resources from the production process because of

speculation.
D. An increase in labor force participation.
An increase in labor force participation would move from a point inside the
production possibilities curve to a point either on it or closer to the curve.
AACSB: Analytic
Blooms: Apply
47. Which of the following is a macro consequence of a sudden increase in the
average level of prices?
A. People on fixed incomes suffer.
B. Uncertainty is greater.
C. Nominal income falls by a smaller percentage than real income.
D. People lengthen their time horizons.
It is more difficult to prepare demand or supply decisions in the years to

come when inflation is uncertain.

Blooms: Understand
Difficulty: 1 Easy
48. Inflation affects production decisions because it
A. Decreases input costs.
B. Reduces speculation.
C. Causes businesses to focus more on the future.
D. Causes businesses to be more cautious since the future is uncertain.
How can a firm know what its revenue or costs will be next year when
inflation is running into the double digits and relative costs and prices are
unstable?
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
49. The uncertainty that results from inflation causes changes in
A. Consumption, saving, and investment behavior.
B. Saving and investment behavior, but not consumption.
C. Consumption, but not saving and investment behavior.
D. Income, but not consumption.
Some individuals will purchase items they think will go up in value due to
the inflation; this speculation draws resources away from more productive
uses.

Blooms: Understand
50. Hyperinflation is
A. An inflation rate in excess of 200 percent, lasting at least one year.
B. An inflation rate in excess of 20 percent, lasting at least one year.
C. A common problem in the United States.
D. The movement of taxpayers to higher tax brackets because of rising

prices.
In such situations workers' wages cannot keep up with rising prices, leaving
many worse off.

Blooms: Remember
Difficulty: 1 Easy
51. Which of the following is a likely macroeconomic consequence of inflation?
A. Focus on long-term planning.
B. Speculation.
C. Antitrust issues.
Individuals will buy and hold real assets and shy away from currency when
they think the real assets will go up in value with the rising price level.

Blooms: Understand
52. Speculation during periods of inflation can result in all of the following
except
A. People buying resources for resale later, rather than using the resources
for current production.
B. A movement inside the production possibilities curve.
C. People buying gold, silver, jewelry, and the like instead of capital for
production.
D. More resources going into the production process.
In fact, resources are actually diverted away from productive uses when
individuals speculate.

Blooms: Understand
53. The movement of taxpayers into higher tax brackets as nominal incomes
grow is
A. Bracket leap.
B. Bracket hike.
C. Bracket creep.
D. Inflation hike.
Unless the tax brackets are adjusted for inflation, bracket creep will impact
many taxpayers whose real income has not increased. If percentage
increases of wages are equal to percentage increases in prices, then the
before-tax real income will be unchanged. However, with inflation moving
the worker into a higher tax bracket, the after-tax real income will fall.

Blooms: Remember
Difficulty: 1 Easy
54. Last year you earned $20,000 and paid taxes in the second tax bracket at 15
percent. This year you earned $25,000, the extra $5,000 just compensating
you for inflation. However, this year you paid taxes in the third bracket at 20
percent. This illustrates the concept of
A. Stagflation.
B. Speculation.
C. Deflation.
D. Bracket creep.
Individuals may end up paying more than they would otherwise in taxes
since their real income has not increased and the tax brackets are not
indexed for inflation. If percentage increases in wages are equal to
percentage increases in prices, then the before-tax real income will be
unchanged. However, with inflation moving the worker into a higher tax
bracket, the after-tax real income will fall.

Blooms: Apply
A. The price level rises.
B. People on fixed incomes are better off.
C. People who hold cash are worse off.
D. Lenders are worse off.
Since price levels fall during deflationary periods, if your nominal income
remains constant, your real income rises and you can actually purchase
more goods and services.

Blooms: Understand
Difficulty: 1 Easy
56. If the price level is falling, all of the following are true except
A. Lenders are better off.
B. Businesses are reluctant to borrow money.
C. Purchasing power increases.
D. Borrowers are not affected.
Borrowers are affected in that the debts they must repay are paid back with
dollars worth more than what they borrowed.

Blooms: Understand
A. Time horizons are longer.
B. Consumer confidence increases.
C. Lenders are better off.
D. Borrowers are better off.
Lenders gain during deflationary periods because they are repaid in dollars
worth more than the ones they lent out.

Blooms: Understand
Difficulty: 1 Easy
58. The Consumer Price Index is
A. A measure of changes in the average price of all goods and services.
B. A measure of changes in the average price of consumer goods and

services.
C. Used to measure the impact of business speculation on consumers.
D. The impact felt by consumers who move into a higher tax bracket
because of inflation.
The CPI takes into account the weight and importance of items purchased
by consumers and uses these data as a measure of inflation.

Blooms: Remember
Difficulty: 1 Easy
Topic: MEASURING INFLATION
59. Which of the following measures changes in the average price of consumer
goods and services?
A. Inflation rate.
B. CPI.
C. Deflation rate.
D. Market basket.
There are many ways to track inflation; the CPI is one of the most widely
used indexes.

Blooms: Remember
Difficulty: 1 Easy
60. To construct the Consumer Price Index, the Bureau of Labor Statistics
must
A. Find out what people buy with their incomes and how the prices of what
they buy change.
B. Find out why people buy, what they buy, and how the prices of what they
buy change.
C. Find out what is in the typical consumer market basket on the basis of
what producers produce.
D. Conduct producer surveys to determine how much prices rise.
The BLS conducts extensive research into what people are buying and
updates the market basket to reflect changes in purchase patterns.

Blooms: Understand
Difficulty: 1 Easy
61. To compute the real income of a household, the index that should be used
is the
A. Producer Price Index (PPI).
B. Consumer Price Index (CPI).
C. GDP deflator.
D. Cost of Living Adjustment (COLA).
The CPI is one of several consumer indexes used as a measure of the

household purchases of goods and services.

Blooms: Understand
Difficulty: 1 Easy
62. The inflation rate is the
A. Monthly percentage rate increase in the price of all goods and services.
B. Annual percentage rate increase in tax brackets.
C. Annual percentage rate increase in the average price level.
D. Monthly adjustment of wages to the cost of living.
The percentage increase in the average price level from year to year is
known as inflation.

Blooms: Remember
Difficulty: 1 Easy
63. A sudden increase in inflation, ceteris paribus,
A. Raises the real income of lenders relative to borrowers.
B. Raises the CPI and reduces real income.
C. Reduces the nominal income of those who have constant real incomes.
D. Makes everyone worse off.
Real income falls because an increase in the price level holding nominal
income constant reduces purchasing power of money. It makes those
people holding real assets better off than those who are holding cash.

Blooms: Understand
64. Assume the CPI increases from 110 to 121, and Manny's nominal income
increases from $100,000 to $120,000 over the same period. Manny's real
income has
A. Increased by approximately 12 percent.
B. Increased by approximately 9 percent.
C. Decreased by approximately 8 percent.
D. Remained the same.
Manny's real income was $90,909.09 (100,000/110 × 100) in year 1 and

$99,173.55 (120,000/121 × 100) in year 2—approximately a 9 percent
((99,173 - 90,909)/90,909) increase.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
65. If the CPI increases from 110 to 125 for one year, the rate of inflation for
that year is
A. 15 percent.
B. 13.6 percent.
C. 1.13 percent.
D. 50 percent.
The percentage change in the price level from one year to the next is the
difference in the CPI divided by the value in the first year: {(125 - 110)/110}
× 100 = 13.6.
AACSB: Analytic
Blooms: Apply
66. If the CPI increases from 250 to 275 for one year, the rate of inflation for
that year is
A. 13 percent.
B. 10 percent.
C. 25 percent.
D. 15 percent.
difference in the CPI divided by the value in the first year, in this case {(275
- 250) ÷ 250} x 100 = 10 percent.
AACSB: Analytic
Blooms: Apply
67. At the beginning of 2006 the CPI was 216.2. At the beginning of 2007, it was
225.1. What was the rate of inflation in 2006?
A. 4.9 percent.
B. 4.1 percent.
C. 3.6 percent.
D. 8.9 percent.
difference in the CPI divided by the value in the first year—in this case
{(225.1 - 216.2) ÷ 216.2} × 100 = 4.1 percent.
AACSB: Analytic
Blooms: Apply
68. At the beginning of 2000, the CPI was 159.3. At the beginning of 2001, it
was 177.6. What was the approximate rate of inflation in 2000?
A. 7.6 percent.
B. 18.3 percent.
C. 10.0 percent.
D. 11.5 percent.
difference in the CPI divided by the value in the first year. In this case,
{(177.6 - 159.3) ÷ 159.3} × 100 = 11.5 percent.
AACSB: Analytic
Blooms: Apply
69. If the Consumer Price Index rose from 180.9 in 2005 to 418.5 in 2015, what
is the total percentage change in prices over this 10-year period?
A. 131.34 percent.
B. 18.5 percent.
C. 80.9 percent.
D. 127.21 percent.
difference in the CPI divided by the value in the first year. In this case,
(418.5 - 180.9) ÷ 180.9 = 1.3134 or 131.34 percent. For further analysis,
this does not measure the inflation rate, which is an annual concept.
However, it can be done on an annualized compound rate if one takes the
number of years or 10th root of (new/old) or 10th root of (418.5/180.9). The
10th root is 1.0875, and then subtract 1, which would give it the annualized
inflation rate of 8.75 percent.
AACSB: Analytic
Blooms: Apply
70. If a price index changed from 150 in 2008 to 148.5 in 2009, while Jim Bob's
nominal wage fell from $25 to $24, then Jim Bob is
A. Better off like everyone else in the economy since prices are lower for
consumers.
B. Neither better nor worse off since his real wage remained constant.
C. Better off since his nominal wage fell slower than the price level did.
D. Worse off since his nominal wage fell faster than the price level did.
Jim Bob experienced a 4 percent decline in his nominal wage while prices
fell on average by 1 percent, causing his real wage to be lower.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
71. For the CPI, the market basket is expressed in terms of what the goods cost
in
A. 1929.
B. 2000.
C. The base period.
D. The optimal period.
A base year is used as a frame of reference for the price level.

Blooms: Remember
Difficulty: 1 Easy
72. The base period is the
A. Time period used for comparative analysis.
B. Absence of significant changes in the average price level.
C. Time period when full employment is reached.
D. First year in which inflation figures were calculated.
A base year is used as a frame of reference for the price level, which will be
equal to 100 in the base year.

Blooms: Remember
Difficulty: 1 Easy
73. The base period used in computing a price index is
A. The year in which prices were at their lowest level.
B. The year in which prices were at their average level.
C. A fixed reference year from which meaningful comparisons can be made.
D. The earliest year for which data are available.
The base year should have a market basket of similar composition to the
year of comparison.

Blooms: Remember
Difficulty: 1 Easy
74. Item weight is the
A. Measure of how much consumers demand a particular item.
B. Percentage of the typical consumer budget spent on the item.
C. Significance placed on a particular item by the wealthiest households.
D. Physical weight of a good or service.
The CPI weights each item in the market basket according to the
percentage spent on it in the typical consumer's budget.

Blooms: Remember
Difficulty: 1 Easy
75. The percentage of total expenditure spent on a specific product is called
A. Core inflation.
B. A market basket.
C. A budget.
D. The item weight.
Items like housing account for a larger weight than items like entertainment
because we spend a greater percentage of our income on housing than
entertainment.

Blooms: Apply
Difficulty: 1 Easy
76. The Producer Price Index (PPI) is the best index to measure average price
changes faced by
A. Consumers.
B. Producers.
C. Importers.
D. Labor unions negotiating COLAs.
The PPI measures changes to the prices of things purchased by businesses.

Blooms: Understand
77. If you were interested in charting prices of resources used by producers of
energy, which of the following would you use?
A. The Producer Price Index (PPI).
B. The Consumer Price Index (CPI).
D. The Cost of Living Adjustment (COLA).
Firms are better served by tracking the price level with the PPI, which looks
more at things they are paying for.

Blooms: Understand
78. Which of the following is often watched closely as a clue to potential
changes in consumer prices in the future?
A. The CPI.
B. The PPI.
D. The COLAs.
When the PPI rises, it forecasts a rise in the CPI because some increases in
cost will be passed to consumers in the form of higher prices for final goods
and services.

Blooms: Understand
79. The GDP deflator
A. Is the price index based on a fixed basket of goods and services for the
government.
B. Is the best measure of inflation for consumers.
C. Reflects the price changes felt by producers but not consumers.
D. Is the broadest price index, covering all output.
The GDP deflator looks at everything produced within the borders of the
United States and so is a broad measure of the price level.

Blooms: Remember
Difficulty: 1 Easy
80. The price index that refers to all final goods and services produced in a
country is the
A. GDP deflator.
B. PPI.
C. CPI.
D. GDP inflator.
The GDP deflator is a broad measure of the price level, tracking prices of all
items inside GDP.

Blooms: Remember
Difficulty: 1 Easy
81. Which of the following is not true for the GDP deflator?
A. It is based on a fixed basket of goods and services.
B. It refers to all goods and services produced in GDP.
C. It typically reveals a lower inflation rate than the CPI.
D. It reflects both price changes and market responses.
The GDP deflator changes as the production of goods and services

changes; in this respect it is very up to date.

Blooms: Understand
82. At the beginning of 1989, the GDP deflator was 93.6. At the end of 2004, it
was 189.2. What was the total percentage change in prices over this 15-
year period?
A. 98.9 percent.
B. 102.14 percent.
C. 59.6 percent.
D. 150.0 percent.
The percentage change in the GDP deflator is equal to the difference in the
values divided by the initial value. The percentage change in the price level
from one year to the next is the difference in the GDP deflator divided by
the value in the first year. In this case, (189.2 - 93.6) ÷ 93.6 = 1.0214 or
102.14 percent. For further analysis, this does not measure the inflation
rate, which is an annual concept. However, it can be done on an annualized
compound rate if one takes the number of years or 15th root of (new/old) or
15th root of (189.2/93.6). The 15th root is 1.0480; then subtract 1, which
would give it the annualized inflation rate of 4.80 percent.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
83. The best price index to use in calculating real GDP is
A. Any of the indexes because they all reflect price level changes.
B. The CPI.
C. The PPI.
D. The GDP deflator.
Since real GDP tracks the production of the entire economy, we want to use
the broadest measure, which is the GDP deflator, as the price level.

Blooms: Understand
84. Which of the following reflects changes in expenditure patterns as well as
price changes?
A. The CPI.
B. The PPI.
D. The COLA.
Since the GDP deflator tracks changes in the prices of all final goods and
services, it is up to date on what is actually being purchased.
AACSB: Analytic
Blooms: Apply
85. Nominal GDP is the
A. Price index that refers to all goods and services included in GDP.
B. Value of final output produced using American-owned factors of

production.
C. Value of final output produced, measured in current prices.
D. Value of final output produced, adjusted for changing prices.
Nominal GDP measures the production of the economy in the prices of the
year in which it was produced.

Blooms: Remember
Difficulty: 1 Easy
86. Real GDP is the
A. Value of final output produced, adjusted for changing prices.
B. Value of final output produced, measured in current prices.
C. Income earned by current factors of production.
D. GDP minus depreciation.
Real GDP is a better gauge of the economy's production because it adjusts

for changes in the price level.

Blooms: Remember
Difficulty: 1 Easy
87. If nominal GDP is constant, then the GDP deflator varies inversely with
A. The unemployment rate.
B. Real GDP.
C. COLAs.
D. The CPI.
If the GDP deflator rises while nominal GDP is constant, real GDP must be
lower; this is due to the fact that prices are higher, so the actual production
must be lower.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
88. If nominal GDP is $9,600 billion and the GDP deflator is 118.5, real GDP is
B. $10,852.7 billion.
Nominal GDP divided by the GDP deflator multiplied by 100 gives real GDP.
AACSB: Analytic
Blooms: Apply
89.
Based on Table 7.1, the rate of inflation between 2002 and 2003 using the
CPI was
A. 1.5 percent.
B. 2.2 percent.
C. 6.2 percent.
D. 4.1 percent.
The inflation rate is equal to the difference in the price index divided by the
CPI in 2002.
AACSB: Analytic
Blooms: Analyze
90.
GDP deflator, was
A. 2.4 percent.
B. 2.9 percent.
C. 6.2 percent.
D. 4.1 percent.
The inflation rate is equal to the difference in the price index divided by the
GDP deflator in 2003.
AACSB: Analytic
Blooms: Analyze
91.
Real GDP can be calculated by dividing the nominal GDP by the GDP
deflator and then multiplying the result by 100.

Blooms: Understand
92.
One can calculate real GDP by dividing the nominal GDP by the GDP
AACSB: Analytic
Blooms: Analyze
93.
Based on Table 7.2, the rate of inflation between 2001 and 2002 using the
CPI was
A. 2.65 percent.
B. 2.58 percent.
C. 3.40 percent.
D. 2.02 percent.
The inflation rate can be calculated by taking the difference in the CPI
values and dividing the result by the value of the CPI in 2001.
AACSB: Analytic
Blooms: Analyze
94.
GDP deflator, was
A. 1.62 percent.
B. 2.68 percent.
C. 4.91 percent.
The inflation rate using the GDP deflator is calculated by taking the
difference in the GDP deflator values and dividing the result by the value of
the GDP deflator in 2001.
AACSB: Analytic
Blooms: Analyze
95.
The real GDP can be determined by dividing the nominal GDP by the GDP

Blooms: Understand
96.
Real GDP can be determined by dividing the nominal GDP by the GDP
AACSB: Analytic
Blooms: Analyze
97. In the Full Employment and Balanced Growth Act of 1978, price stability
means that
A. There is zero inflation each year.
B. Inflation is less than 5 percent per year.
C. The inflation rate is the same each year.
D. Inflation is less than 3 percent per year.
Price stability means low inflation, not necessarily 0 percent inflation.

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-03 The meaning of "price stability."
Topic: THE GOAL: PRICE STABILITY
98. If some specific prices fall, some relative prices rise, and average prices
remain unchanged, there has been a period of
A. Stable price levels.
B. Inflation.
C. Deflation.
D. Disinflation.
Relative prices may change like the waves on a lake, but price stability
means that the average price, like the average level of the lake, is
unchanging.

Blooms: Remember
99. In the Full Employment and Balanced Growth Act of 1978,
A. Congress set an inflation goal of no more than 3 percent.
B. The president set an inflation goal of 0 percent.
C. Alan Greenspan set an inflation goal of 0 percent.
D. An unemployment goal of 4 percent was set, but no inflation goal could

be set.
Maintaining low inflation is an important macroeconomic goal.

Blooms: Understand
Difficulty: 1 Easy
100. Price stability
A. Is defined as a 0 percent rate of inflation in the Full Employment and

B. Is targeted at a 3 percent rate of inflation by Alan Greenspan, the head of

the Federal Reserve.
C. Has been officially set by Congress at 3 percent or less.
D. Has been achieved consistently in the 20th century in the United States.
It is important to maintain price stability so that price changes do not cause

instability and speculation.

Blooms: Remember
Difficulty: 1 Easy
101. An inflation goal set at a low rate but greater than zero allows all of the
following except
A. The economy to achieve both full employment and price stability at the
same time.
B. For errors because of new products.
C. For price increases caused by quality improvements.
D. The Fed to meet less often.
There is no particular relationship between the inflation rate and the

number of times the Fed needs to meet.
AACSB: Analytic
Blooms: Apply
102. If the CPI doesn't measure product quality improvements, the CPI tends to
A. Understate the inflation rate.
B. Overstate the inflation rate.
C. Understate economic growth.
D. Be artificially low.
If the CPI registers a price increase that is due to quality improvements,

unfortunately that is mistaken for inflation; but in fact consumers are paying
more to get more.

Blooms: Remember
103. Which one of the following statements about the United States is true?
A. Prior to World War II, the United States experienced periods of both
B. The United States has experienced inflation virtually every year since
1800.
C. Since World War II, the United States has experienced deflation.
D. Prior to World War II, the United States experienced deflation virtually
every year; since World War II, the United States has consistently
experienced inflation.
Before World War II, the economy expanded and experienced inflation and
contracted, experiencing deflation with changes to the business cycle.

Blooms: Understand
Learning Objective: 07-04 The broad causes of inflation.
Topic: THE HISTORICAL RECORD
104. All of the following statements about inflation in the United States are
correct except
A. Since the Great Depression, average prices have risen almost every year.
B. The inflation rate was 13.5 percent in 1980.
C. Prior to World War II, the United States experienced periods of both
D. Inflation was at its worst during the Great Depression.
During the Great Depression, deflation was actually a significant concern.

Blooms: Understand
Topic: THE HISTORICAL RECORD
105. If consumers attempt to buy more goods than the economy can produce,
the result is
A. Unemployment.
D. The wealth effect.
When excess demand causes the price level to rise, the result is demand-
pull inflation because it is the increase in demand that is causing prices to
rise.

Blooms: Understand
Difficulty: 1 Easy
Topic: CAUSES OF INFLATION
106. If the economy is producing at capacity and consumers are willing and able
to buy more, this may cause
A. Demand-pull inflation.
B. Cost-push inflation.
C. Supply-side inflation.
D. The price effect.
Excess demand that results in an increasing price level is known as

demand-pull inflation.

Blooms: Understand
107. When natural disasters, such as hurricanes on the U.S. Gulf Coast or an
earthquake in Japan, disrupt supply chains and push up the costs of
production, this may result in
A. Labor-push inflation.
C. Wage-pull inflation.
D. Cost-push inflation.
Inflation that results from higher production costs in known as cost-push

inflation.

Blooms: Understand
108. When production costs increase and producers raise output prices, the
result is
A. The price effect.
B. Unemployment.
D. Demand-pull inflation.
When inflation results from higher production costs, the economy is

experiencing cost-push inflation.

Blooms: Understand
109. If OPEC raises the price of oil and production costs increase, this may
cause
A. Cost-push inflation.
C. Hyperinflation.
D. Super-pull inflation.
Cost-push inflation occurs when input costs rise, leading producers to raise
prices to maintain profitability.

Blooms: Understand
Difficulty: 3 Hard
110. A COLA is
A. A mortgage that adjusts the nominal interest rate to changing rates of

inflation.
B. A price index that refers to all goods and services included in GDP.
C. An automatic adjustment of nominal income to the rate of inflation.
D. An inflation rate of at least 200 percent, lasting more than one year.
To maintain constant real income, COLAs (cost-of-living adjustments) can

be used to keep nominal income rising at the same rate as the price level.

Blooms: Remember
Difficulty: 1 Easy
Topic: PROTECTIVE MECHANISMS
111. Cost-of-living adjustments
A. Reduce the price effect of inflation.
B. Allow individuals to maintain their purchasing power during inflation.
C. Cause individuals to shorten their time horizons.
D. Maintain constant real interest rates.
Real income can be maintained at a constant level if the nominal income is

allowed to adjust in step with the price level.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
112. A mortgage that adjusts the nominal interest rate to changing rates of
inflation is
A. An ARM.
B. A PPI.
C. A GDM.
D. A COLA.
An ARM, or adjustable-rate mortgage, is designed to protect the lender from

unanticipated inflation.

Blooms: Remember
Difficulty: 1 Easy
113. When inflation suddenly increases, ARMs
A. Protect against rising real interest rates.
B. Protect the purchasing power of workers' wages.
C. Protect borrowers against the effects of inflation.
D. Maintain a stable real interest rate.
The real interest rate can be held constant if the nominal interest rate
adjusts with changes in the inflation rate.

Blooms: Remember
114. The real interest rate is
A. The difference between the prime rate and the rate charged by the
government (the Federal Reserve) on loans.
B. The nominal interest rate minus the anticipated rate of inflation.
C. The inflation rate minus the percentage increase in average wages.
D. The sum of inflation rates and unemployment rates.
The real rate of interest is the return to the lender after adjusting for
inflation.

Blooms: Remember
Difficulty: 1 Easy
115. All of the following are true of the real interest rate except it
A. Is equal to the nominal interest rate minus the anticipated rate of

inflation.
B. Is stabilized by ARMs.
C. Is the inflation-adjusted rate of interest.
D. Equals the foreign exchange rate minus the inflation rate.
The real interest rate equals the nominal interest rate minus the rate of
inflation.

Blooms: Remember
116. If the nominal interest rate is 13 percent and the anticipated rate of inflation
A. 13 percent.
B. 21 percent.
C. 5 percent.
D. -5 percent.
The real interest rate, which measures the change in purchasing power, is
determined by subtracting the anticipated rate of inflation from the nominal
interest rate.
AACSB: Analytic
Blooms: Analyze
117. If the nominal interest rate is 6 percent and the anticipated rate of inflation
A. 6 percent.
B. 12 percent.
C. 3 percent.
D. 0 percent.
The real interest rate is equal to the nominal interest rate minus the
anticipated rate of inflation.
AACSB: Analytic
Blooms: Analyze
118. If the nominal interest rate is 10 percent and the real interest rate is 6
percent,
A. The expected rate of inflation is 4 percent.
B. The expected rate of inflation is 6 percent.
C. Real GDP must exceed nominal GDP.
D. Nominal GDP equals real GDP.
The expected rate of inflation is equal to the nominal real rate of interest
minus the real rate of interest.
AACSB: Analytic
Blooms: Apply
119.
Using Figure 7.4, expected inflation was
A. Greater during the period from 1970 to 1975 than it was during the period
from 1980 to 1985.
B. The same in 1970 and 1995.
C. Greater in 1970 than in 1995.
D. Greater during the period from 1980 to 1985 than it was during the
period from 1970 to 1975.
Because the gap between the nominal interest rate and the real interest
rate was larger in the 1980 to 1985 period, there was a higher expected
inflation rate.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
120.
For the economy represented in Figure 7.4, which of the following

statements is definitely true?
A. Anticipated inflation was greater than actual inflation.
B. Actual inflation was greater than anticipated inflation.
C. Inflation was anticipated.
D. Inflation occurred.
There must have been inflation because every year the nominal rate of
interest was higher than the real rate of interest.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
121.
Consider the economy represented in Figure 7.4. If actual inflation was

greater than anticipated inflation,
A. Borrowers would experience a decrease in real income.
B. Lenders would experience a decrease in real income.
C. Lenders would experience an increase in real income.
D. The Federal Reserve would be forced to step in to increase lending.
Lenders would be worse off because borrowers would repay their loans
with dollars worth less than what they borrowed.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
122. The most fundamental function of prices in a market economy is to provide
A. The data necessary to calculate rates of inflation.
B. The basis for the calculation of sales tax.
C. Information about the relative scarcities of resources and goods and

services.
D. Maximum profits to producers.
Inflation actually distorts this important role of prices.

Blooms: Understand
Difficulty: 1 Easy
123. The most desirable inflation rate is the rate that
A. Equals the official goal of 3 percent.
B. Has the least effect on the behavior of companies, investors, consumers,

and workers.
C. Maximizes the "wealth effect" of inflation.
D. Coincides with an unemployment rate of 0 percent.
As long as inflation is low and stable, individuals can easily factor it into
their expectations.

Blooms: Understand
Difficulty: 1 Easy
current dollars, is
A. Nominal income.
B. Fixed income.
C. Real income.
D. Asset income.
Nominal income is not adjusted to any changes in the price level.
AACSB: Analytic
Blooms: Understand
125. If your nominal income rises faster than the price level,
A. Your real income has fallen.
B. Your real income has risen.
C. You can buy fewer goods and services.
D. There must be deflation.
Real income can rise when nominal income is rising faster than the price
level, or real income can fall if nominal income is rising slower than the
price level.
AACSB: Analytic
Blooms: Understand
Difficulty: 3 Hard
126. According to the text, which group of assets increased the most in
percentage terms from 1991 to 2001?
A. Housing.
B. Gold.
C. Stocks.
D. Bonds.
Inflation does not affect everyone equally; the way wealth is held has a big
effect on whether one wins or loses from inflation.
AACSB: Analytic
Blooms: Understand
127. All of the following are detrimental macro consequences of inflation except
A. Uncertainty.
B. Speculation.
C. Bracket creep.
D. COLAs.
COLAs are designed to protect workers and retirees against rising prices
that would erode their purchasing power.
AACSB: Analytic
Blooms: Understand
128. Which of the following indexes tracks changes in the average prices paid by
consumers?
A. CPI.
B. PPI.
C. GDP deflator.
D. The market basket.
The Consumer Price Index (CPI) is used to track changes to the cost of the
basket of goods that the typical consumer purchases.
AACSB: Analytic
Blooms: Understand
129. If your nominal income remains constant at $3,000 while the price of an
important product in your budget, such as cell phone service, rises from $50
to $100, your real income has
A. Decreased by $50.
B. Decreased by $100.
C. Decreased by $150.
D. Remained constant.
Being forced to pay higher prices while income remains constant indicates
that one's purchasing power is falling.

Blooms: Understand
Difficulty: 3 Hard
130. The core inflation rate excludes
A. Entertainment and packaging prices.
B. Food and energy prices.
C. Only energy prices for the airlines.
D. Import prices.
The core inflation rate excludes changes in food and energy prices, which
have a lot of month-to-month variation.
AACSB: Analytic
Blooms: Understand
131. The most visible consequence of inflation is
A. A rise in employment.
B. A rise in production.
C. A rise in the price level.
D. A change in government regulation.
People who buy products that are increasing in price the fastest end up
worst off.

Blooms: Understand
132. Changes in relative prices may occur
A. Only in periods of stable prices.
B. Only in periods of inflation or deflation.
C. In periods of stable prices or in periods of inflation or deflation.
D. In none of the other choices.
Relative prices are always changing.

Blooms: Understand
True / False Questions

133. Inflation is an increase in the average level of prices of goods and services.
TRUE
On average, prices rise by the inflation rate, but some may rise faster or
slower than the inflation rate.

Blooms: Remember
Difficulty: 1 Easy
134. Relative price changes are a desirable and essential ingredient of the
market mechanism.
TRUE
Relative prices changes when there is a change in relative scarcity.

Blooms: Understand
Difficulty: 1 Easy
135. When restaurant prices rise faster than prices of food at grocery stores, real
income rises for people who visit restaurants relative to those who cook for
themselves.
FALSE
The real income of those who visit restaurants actually falls because the
relative price of meals has increased.
AACSB: Analytic
Blooms: Apply
136. If your real income rises but your nominal income falls, then you benefit
from deflation.
TRUE
In this case, the price level is falling faster than your nominal income is, so
your real income rises.

Blooms: Understand
Difficulty: 1 Easy
137. Redistribution of wealth is a microeconomic effect of inflation.
TRUE
Assuming that buyers' nominal incomes remain constant, redistribution of

wealth occurs because buyers of goods will be worse off and sellers will be
better off when prices rise.

Blooms: Understand
Difficulty: 1 Easy
138. Money illusion results from expectations based on real purchasing power
rather than current nominal income.
FALSE
Money illusion is based on expectations of nominal income, not purchasing

power.

Blooms: Understand
Difficulty: 1 Easy
139. Uncertainty and speculation are microeconomic effects of inflation.
FALSE
Uncertainty and speculation are macroeconomic effects of inflation.

Blooms: Understand
Difficulty: 1 Easy
140. The undesirable effects of bracket creep can be eliminated by indexing

marginal tax rates.
TRUE
If incomes rise due to inflation, this will move some earners into a higher tax
bracket unless tax rates are indexed to the price level.

Blooms: Understand
Difficulty: 1 Easy
141. The CPI is a measure of changes in the average price of consumer goods
and services.
TRUE
The CPI is a price index that is designed to track the spending patterns of
the typical consumer.

Blooms: Remember
Difficulty: 1 Easy
142. The core inflation rate involves all price changes including food and energy.
FALSE
The core inflation rate excludes the prices of food and energy.

Blooms: Remember
Difficulty: 1 Easy
143. If the average price level increases by 2 percent this year, price stability has
been achieved.
TRUE
Price stability as defined by the Full Employment and Balanced Growth Act
of 1978 is an inflation of 3 percent or less per year.

Blooms: Evaluate
144. In order to achieve price stability, inflation must be zero.
FALSE
As long as inflation is 3 percent or less, price stability has been achieved.

Blooms: Understand
Difficulty: 1 Easy
145. Demand-pull inflation is the result of excessive pressure on the demand
side of the economy.
TRUE
When there is too much demand relative to supply in the overall economy,
there will be demand-pull inflation.

Blooms: Understand
Difficulty: 1 Easy
146. Cost-push inflation can occur as the result of higher wage rates.
TRUE
Anything that causes costs to rise in production will lead to cost-push

inflation.

Blooms: Understand
147. The real interest rate is the rate of inflation minus the nominal interest
rate.
FALSE
The real interest rate is the nominal interest rate minus the anticipated rate
of inflation.

Blooms: Understand
Difficulty: 1 Easy
Essay Questions
148. During a period of inflation, are all prices rising? Explain your answer.
No. Inflation is defined as an increase in the average level of prices.

Inflation does not mean that all prices are rising. Relative prices may stay
the same, increase, or decrease during inflation.

Blooms: Understand
149. Is everyone worse off because of inflation? Why or why not?
No. During inflation some people are better off and some people are worse
off. Inflation does not affect everyone equally because people buy and sell
different combinations of goods and assets. Inflation redistributes income
and wealth by altering relative prices.

Blooms: Understand
150. Why did the Full Employment and Balanced Growth Act establish 3 percent
inflation as the benchmark rather than zero inflation?
The goal was set at 3 percent because of unemployment concerns and to

allow for quality changes. If the inflation goal is set too low, the government
might decrease spending to stay within the limits of the goal, and this would
cause unemployment to increase. In this case, some inflation is the cost to
keep unemployment from rising. In addition, over time the quality of goods
improves and new products are introduced. The CPI measures price
changes but not product changes and thus may overstate inflation. The goal
of 3 percent allows for these changes.

Blooms: Understand
Difficulty: 3 Hard
151. What is the difference between demand-pull inflation and cost-push
inflation?
Demand-pull inflation occurs because of excessive pressure on the demand

side of the economy. If consumers want to buy more goods than the
economy can produce, prices are bid up. During this process, total demand
in the economy increases, and there is inflation. Cost-push inflation occurs
because of pressure on the supply side. If production costs begin to rise,
producers are likely to raise output prices in an effort to maintain profits. As
producers pass along their costs to consumers in the form of higher prices,
this also causes inflation.

Blooms: Understand
Difficulty: 3 Hard
152. Discuss two mechanisms that offer protection from the effects of inflation.
Cost-of-living adjustments (COLAs) are automatic adjustments of nominal

income to the rate of inflation. COLAs protect real incomes when prices are
rising. Adjustable-rate mortgages (ARMs) protect creditors during periods
of inflation. ARMs adjust the nominal interest rate to changes in the rate of
inflation. The goal is to maintain a stable real interest rate.

Blooms: Understand
Difficulty: 3 Hard
153. Based on the real interest rate, who tends to benefit from unanticipated
inflation in terms of borrowing and lending?
The real interest rate is the nominal interest rate minus the anticipated
inflation rate. During periods of unanticipated inflation, borrowers tend to
benefit and lenders tend to lose. If the nominal interest rate is fixed, the real
interest rate tends to become very low or even negative as inflation
increases. Borrowers enjoy paying the low real interest rate, but lenders do
not enjoy earning it.

Blooms: Understand
Difficulty: 3 Hard

Economy Today 13th Edition Schiller Test Bank 1

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Economy Today 13th Edition Schiller Test Bank 1

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Economy Today 13th Edition by Schiller

Hill Wall ISBN 0073523216

Multiple Choice Questions

A. A rise in the price of every good but not any service.

B. An increase in relative prices of all goods and services.

C. A situation in which purchasing power increases.

D. An increase in the average level of prices of goods and services.

A. In most countries today.

B. In the United States.

C. During wartime periods.

D. None of the other choices.

A. Specific prices are rising, and relative prices are falling.

B. Both relative prices and average prices are rising.

4. A decrease in the average level of prices of goods and services is

D. increase followed by a decrease

6. When there is no deflation or inflation,

A. Prices of all goods change by the same percentage.

B. Relative prices remain unchanged.

C. Average prices do not change.

D. Full employment is achieved.

According to Figure 7.1 in Country A,

B. Relative prices were definitely constant.

C. Average prices and relative prices were definitely changing.

D. Average prices were constant, and unemployment was increasing.

A. Relative prices were changing.

C. Real incomes were increasing.

During the time period represented in Figure 7.1, Country A

A. Experienced periods of both inflation and deflation.

C. Had no need for COLAs.

D. Experienced only inflation.

A. The countries had approximately the same rate of inflation.

B. The CPI was virtually equal in the two countries.

C. The market basket cost approximately the same in both countries.

D. Real incomes were rising at the same rate in both countries.

B. A decrease in purchasing power because of rising prices.

C. The amount of income a particular good requires.

D. The current price paid for a good or service.

12. Changes in relative prices may occur in a period of

A. Stable prices only.

D. Stable prices, inflation, or deflation.

13. Changes in the relative prices of two goods indicate

C. That average prices for the period must not be stable.

D. Changes in the desired mix of output.

A. Computing real income from nominal income.

B. Indicating an overheating economy.

C. Signaling changes in the desired mix of output.

D. Measuring the rates of inflation.

D. More information is required to answer this question.

D. More information is required to answer this question.

A. Has risen while its absolute price has fallen.

B. And its absolute price have risen.

C. And its absolute price have fallen.

D. Has fallen while its absolute price has risen.

A. Determining the redistribution of income.

B. Determining the inflation rate.

C. Deflating nominal income.

D. Determining if there is deflation.

A. Rising prices fail to signal desirable changes in the mix of output.

C. Relative prices remain unchanged.

D. All loans are indexed to inflation.

B. Increased windfall profits to creditors who have lent large amounts of

C. Redistributions of income and wealth between different groups.

D. Creditors are made better off.

22. All of the following are microeconomic consequences of inflation except