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Economics For Today 9th Edition
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1. Which of the following correctly defines inflation?
a. An increase in the price of a particular good or service.
b. An increase in the general (average) price level of goods and services in the economy.
c. The growth rate in real GDP.
d. None of the above.
ANSWER: b
DIFFICULTY: Easy
NATIONAL STANDARDS: United States - BUSPROG:Analytic:Ref - BUSPROG: Analytic
TOPICS: Meaning and Measurement of Inflation
2. The best definition of inflation is a(n):

a. temporary increase in prices.
b. increase in the price of one important commodity such as food.
c. persistent increase in the general level of prices as measured by a price index.
d. increase in the purchasing power of the dollar.
ANSWER: c
DIFFICULTY: Easy
NATIONAL STANDARDS: United States - BUSPROG: Analytic
3. Inflation:
a. reduces the cost-of-living of the typical worker.
b. is measured by changes in the cost of a typical market basket of goods between time periods.
c. causes the purchasing power of a dollar to rise.
d. has no effect on real income.
ANSWER: b
DIFFICULTY: Easy
4. Which of the following is true of inflation?

a. It is an increase in the general price level of goods and services.
b. The purchasing power of money increases as the result of inflation.
c. Inflation is similar to interest payments on future money income, such as pensions and receipts from
outstanding loans.
d. Inflation has no effect on real income.
ANSWER: a
DIFFICULTY: Moderate
5. Inflation is an increase in:

a. prices of all products in the economy.
b. homes, autos and basic resources.
c. the general price level of products.
d. none of these.
Cengage Learning Testing, Powered by Cognero Page 1
ANSWER: c
DIFFICULTY: Easy
6. Inflation is defined as an increase in:

a. real wages of workers.
b. real GDP.
c. the average price level.
d. all consumer products.
ANSWER: c
DIFFICULTY: Easy
7. In which of the following years was inflation in the United States the highest?
a. 1960.
b. 1970.
c. 1980.
d. 1990.
e. 2007.
ANSWER: c
DIFFICULTY: Easy
8. Inflation is measured by an increase in:

a. homes, autos and basic resources.
b. prices of all products in the economy.
c. the consumer price index (CPI).
d. none of these.
ANSWER: c
DIFFICULTY: Easy
9. An increase in the general price level is termed:

a. the Consumer Price Index.
b. inflation.
c. deflation.
d. stagflation.
e. nominal pricing.
ANSWER: b
DIFFICULTY: Easy
10. Tina Eckstrom and her husband bought a deferred annuity that started paying them $700 a month in retirement
benefits. They, along with millions of other people who live on fixed incomes, are examples of:
a. those who are responsible for inflation.
b. the big winners from inflation.
c. the big losers from inflation.
d. the paradox of thrift.
e. stock market losers.
ANSWER: c
DIFFICULTY: Challenging
NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking - BUSPROG: Analytic
TOPICS: Consequences of Inflation
11. Losers from inflation include:

a. savers and borrowers.
b. landlords and the government.
c. borrowers and the government.
d. those on a fixed income and borrowers.
e. those on a fixed income and savers.
ANSWER: e
DIFFICULTY: Easy
12. Suppose that last year you borrowed $100 at 5 percent interest to purchase a $100 pair of Nike cross-training shoes.
This year you repaid the bank with interest. If the inflation rate was 10 percent last year, your purchase of the shoes
would:
a. make you an inflation winner as you saved $5 on the shoes.
b. make you an inflation loser as you paid $5 more than you should have for the shoes.
c. not be affected at all by the inflation rate.
d. be taxed according to COLA adjustments.
e. make you an inflation loser because of bracket creep.
ANSWER: a
13. Union contracts with built-in cost-of-living adjustments and home mortgages that vary with the rate of inflation are:
a. inappropriate ways of combating inflation.
b. examples of bracket creep.
c. means of implementing fiscal policy.
d. steps that can be taken to decrease the adverse impacts of inflation.
e. examples of failed discarded policies of the 1970s.
ANSWER: d

14. Those hurt by inflation include:

a. labor unions with COLA clauses.
b. borrowers.
c. savers.
d. owners of real estate.
e. owners of precious metals, antiques, and works of art.
ANSWER: c
DIFFICULTY: Easy
15. Which one of the following groups benefits from inflation?

a. Borrowers.
b. Savers.
c. Landlords.
d. Lenders.
ANSWER: a
DIFFICULTY: Easy
16. In periods of high inflation,

a. people want to hold on to as much money as possible.
b. the purchasing power of money is decreasing.
c. nobody wants to work and earn income.
d. low nominal interest rates are likely to result.
e. nobody wants to buy goods and services.
ANSWER: b
DIFFICULTY: Easy
17. Which of the following is true about inflation?

a. Inflation promotes social harmony by uniting people against the government.
b. Inflation is more damaging if it is anticipated.
c. Accurate anticipation of inflation is possible for everyone who is well informed about economic events.
d. Those who lend money at a rate below the rate of inflation suffer economic losses.
e. If people accurately anticipate inflation, their actions will prevent it.
ANSWER: d

18. If the consumer price index (CPI) in Year X was 300 and the CPI in Year Y was 325, the rate of inflation for
Year Y was:
a. 325 percent.
b. 25 percent.
c. 5 percent.
d. 8 percent.
ANSWER: d
19. Suppose that the consumer price index of a country was 160 at Year X and 168 at the end of Year Y. What was the
country's inflation rate during Year Y?
a. 5 percent.
b. 8 percent.
c. 60 percent.
d. 68 percent.
ANSWER: a
20. Suppose that the consumer price index (CPI) was 160 in Year X and 166 in Year Y, inflation during Year Y was
approximately:
a. zero; prices were stable.
b. 3.8 percent.
c. 6 percent.
d. 66 percent.
ANSWER: b
21. Which of the following is the largest single component of the market basket used to compute the consumer price index
(CPI)?
a. Food and beverages.
b. Housing.
c. Transportation.
d. Medical care.
ANSWER: b
DIFFICULTY: Easy
22. Suppose hypothetically that you buy a lot of food such as tofu, veggie burgers, and organic fruit that are not included
in the market basket used to compute the CPI. In addition, suppose that all of these goods have become cheaper over the
last year, while the overall CPI has increased by 6 percent. Then which of the following is true?
a. The CPI will understate the negative impact of inflation on your purchasing power and standard of living.
b. The CPI will still accurately state the negative impact of inflation on your purchasing power and standard of
living.
c. The CPI will overstate the negative impact of inflation on your purchasing power and standard of living.
d. None of the answers above are correct.
ANSWER: c
23. If the quality of items improves over time, the CPI ________ inflation.
a. overstates
b. understates
c. equals
d. approximates
ANSWER: a
DIFFICULTY: Easy
24. The salary of the president of the United States in 2000 was $400,000. In 1940, the president's salary was $75,000. If
the Consumer Price Index was 8.1 in 1940 and 100 in 2000, the 1940 presidential salary measured in terms of the
purchasing power of the dollar in 2000 would be:
a. less than $75,000.
b. less than $400,000.
c. approximately $668,850.
d. approximately $926,000.
ANSWER: d
25. One way the consumer price index (CPI) differs from the GDP chain price index is that the CPI:
a. uses current year quantities of goods and services.
b. includes separate market baskets of goods and services for both base and current years.
c. includes only goods and services bought by typical urban consumers.
d. is bias free.
ANSWER: c
DIFFICULTY: Easy
26. One way the consumer price index (CPI) differs from the GDP chain price index is that it:
a. includes only purchases of items bought by typical urban consumers.
b. uses only current year quantities.
c. is based on all final goods and services.

d. includes only services.
ANSWER: a
DIFFICULTY: Easy
27. If the consumer price index (CPI) in Year 1 was 200 and the CPI in Year 2 was 215, the rate of inflation was:
a. 215 percent.
b. 15 percent.
c. 5 percent.
d. 7.5 percent.
e. 8 percent.
ANSWER: d
28. Suppose the consumer price index (CPI) for Year X is 130. This means the average price of goods and services is:
a. currently $130.
b. 130 percent more in Year X than in the base year.
c. 130 percent more in the base year than in Year X.
d. priced at 30 percent more in Year X than in the base year.
ANSWER: d
29. Suppose a market basket of goods and services costs $400 in the base year and the consumer price index (CPI) is
currently 125. This indicates the price of the market basket of goods is now:
a. $275.
b. $425.
c. $500.
d. $525.
ANSWER: c
30. According to the Bureau of Labor Statistics' survey, which category represents the largest expense for the typical
urban family?
a. Housing.
b. Food and beverages.
c. Transportation.
d. Medical care.
ANSWER: a
DIFFICULTY: Easy
31. Suppose the consumer price index (CPI) stands at 250 this year. If the inflation rate is 10 percent, then next year's CPI
will equal:
a. 250.
b. 260.
c. 275.
d. 500.
ANSWER: c
32. Suppose hypothetically that the consumer price index (CPI) was 150 in Year 1 and was 180 in Year 2. What would be
the inflation rate for this period?
a. 12 percent.
b. 16.7 percent.
c. 20 percent.
d. 30 percent.
ANSWER: c
33. Consider an economy with only two goods: bread and wine. In 1982, the typical family bought 4 loaves of bread at
50¢ per loaf and 2 bottles of wine for $9 per bottle. In Year X, bread cost 75¢ per loaf and wine cost $10 per bottle. The
CPI for Year X (using a 1982 base year) is:
a. 100.
b. 115.
c. 126.
d. 130.
ANSWER: b
34. The consumer price index (CPI):

a. adjusts for changes in product quality.
b. includes separate market baskets of goods and services for both base and current years.
c. includes only goods and services bought by typical urban consumer.
d. uses current year quantities of goods and services.
ANSWER: c
DIFFICULTY: Easy

35. Which of the following statements is true?
a. Deflation is an increase in the general level of prices.
b. The consumer price index (CPI) measures changes in the average prices of consumer goods and services.
c. Disinflation is an increase in the rate of inflation.
d. Real income is the actual number of dollars received over a period of time.
e. The real interest rate equals the nominal rate of interest plus the inflation rate.
ANSWER: b
36. If the consumer price index in Year 1 was 200 and the CPI for Year 2 was 230, the rate of inflation was:
a. 15 percent.
b. 7.5 percent.
c. 30 percent.
d. 230 percent.
ANSWER: a
37. Suppose a market basket of goods and services costs $1,000 in the base year and the consumer price index (CPI) is
currently 110. This indicates the price of the market basket of goods and services is now:
a. $110.
b. $1,000.
c. $1,100.
d. $1,225.
ANSWER: c
38. A measure comparing the prices of consumer goods and services that a household typically purchases to the prices of
those goods and services purchased in a base year is:
a. the GDP deflator.
b. the consumer price index.
c. the price level.
d. inflation.
e. the base measure.
ANSWER: b
DIFFICULTY: Easy
39. Suppose we shopped for a basket of goods in Year 1 and it cost $350. Suppose the same basket of goods adds up to
$385 in Year 2. If we use Year 1 as a base year, what would be the Year 2 CPI?
a. 35.
b. 90.
c. 100.
d. 110.
e. 135.
ANSWER: d
40. The Consumer Price Index compares the:

a. prices of all goods and services in the economy compared to the prices of those goods and services in a base
year.
b. prices of consumer goods and services that a household purchases to the prices of those goods and services
purchased in a base year.
c. prices of producer goods and services that are made for consumers to the prices of those goods and services in
a base year.
d. prices of goods and services that are purchased by producers to the prices of those goods and services in a base
year.
e. prices of goods and services that are purchased by consumer manufacturers to the prices of those goods and
services in a base year.
ANSWER: b
DIFFICULTY: Easy
Exhibit 7-1 Consumer Price Index
Consumer
Year Price Index
1 100
2 110
3 115
4 120
5 125
41. As shown in Exhibit 7-1, the rate of inflation for Year 2 is:
a. 5 percent.
b. 10 percent.
c. 20 percent.
d. 25 percent.
ANSWER: b
DIFFICULTY: Easy
a. 4.2 percent
b. 5 percent.
c. 20 percent.
d. 25 percent.
ANSWER: a
DIFFICULTY: Easy
43. Suppose the price of banana rises over time and consumers respond by buying fewer bananas. This situation
contributes to which bias in the consumer price index?
a. Substitution bias.
b. Transportation bias.
c. Quality bias.
d. Indexing bias.
ANSWER: a
44. Suppose a market basket of goods and services costs $400 in the base year and $500 this year. The consumer price
index (CPI) for this year is:
a. 25.
b. 100.
c. 125.
d. 500.
ANSWER: c
45. Which of the following would understate the consumer price index?
b. Deteriorating quality of products.
c. Improving quality of products.
d. Law of demand bias.
ANSWER: c
TOPICS: Consumer Price Index Criticism
46. As the price of gasoline rose during the 1970s, consumers cut back on their use of gasoline relative to other consumer
goods. This situation contributed to which bias in the consumer price index?
c. Quality bias.
d. Indexing bias.
ANSWER: a

47. The substitution bias is believed to cause the consumer price index to:
a. overstate the true rate of inflation.
b. understate the true rate of inflation.
c. understate the true GDP deflator.
d. none of these.
ANSWER: a
48. As inflation drives up prices, people attempt to find substitutes and adjust what they buy. The resulting substitution
bias problem causes the CPI to:
a. overstate the impact of higher prices on consumers.
b. consistently underestimate the true inflation rate.
c. omit the benefits of product quality improvements.
d. have larger fluctuations than other price indexes.
ANSWER: a
49. Suppose the price of gasoline rises and consumers cut back on their use of gasoline relative to other consumer goods.
This situation would contribute to which bias in the consumer price index?
c. Quality bias.
d. Indexing bias.
ANSWER: a
TOPICS: Consumer Price Index Criticism
Exhibit 7-2 Consumer Price Index
Consumer
Year Price Index
1 80
2 100
3 105
4 125
5 150
a. 5 percent.
b. 10 percent.

c. 20 percent.
d. 25 percent.
ANSWER: d
a. 5 percent.
b. 10 percent.
c. 20 percent.
d. 25 percent.
ANSWER: a
a. 5 percent.
b. 10 percent.
c. 19 percent.
d. 20 percent.
e. 25 percent.
ANSWER: c
a. 5 percent
b. 10 percent.
c. 20 percent.
d. 25 percent.
ANSWER: c
54. Deflation refers to a:

a. decreasing relative prices.
b. decreasing price level.
c. slowing down of the rate of inflation.
d. federal government policy of running budget surpluses.
ANSWER: b
DIFFICULTY: Easy
55. Deflation means a decrease in:

a. the rate of inflation.
b. the prices of all products in the economy.
c. homes, autos, and basic resources.
d. the general level of prices in the economy.
ANSWER: d
DIFFICULTY: Easy
56. Deflation:
a. was prevalent during the oil shocks of the 1970s.
b. will cause consumers' purchasing power to shrink.
c. has been persistent in the U.S. economy since the Great Depression.
d. none of these.
ANSWER: d
57. The base year in the consumer price index (CPI) is:
a. given a value of zero.
b. a year chosen as a reference for prices in all other years.
c. always the first year in the current decade.
d. established by law.
ANSWER: b
DIFFICULTY: Easy
58. Price indexes like the CPI are calculated using a base year. The term base year refers to:
a. the first year that price data are available.
b. any year in which inflation was higher than 5 percent.
c. the most recent year in which the business cycle hit the trough.
d. an arbitrarily chosen reference year.
ANSWER: d
DIFFICULTY: Easy
59. A reduction in the rate of inflation is called:

a. deflation.
b. disinflation.
c. hyperinflation.
d. cost-push inflation.
ANSWER: b
DIFFICULTY: Easy
60. Disinflation means a decrease in:

a. the rate of inflation.
b. the general level of prices in the economy.
c. the prices of all products in the economy.
d. the circular flow.
ANSWER: a
DIFFICULTY: Easy
61. Suppose that your income during Year X was $50,000, and the CPI for Year X was 150 (base year =
Z=100). Back in Year Z your income was $30,000. Has your real income increased or decreased from Z to year
X? By how much?
a. Increased by $5,000.
b. Increased by $3,333.
c. Unchanged.
d. Decreased by $3,333.
e. Decreased by $5,000.
ANSWER: b
62. A worker would be hurt least by inflation when the:

a. worker anticipates inflation and increases savings at the bank.
b. worker is protected by a cost-of-living adjustment clause in an employment contract.
c. price level increases but at a decreasing rate.
d. worker is protected by fixed annual increases in wages and benefits in an employment contract.
ANSWER: b
63. Suppose you received a 5 percent increase in your nominal wage. Over the year, inflation ran about 2 percent. Which
of the following is true?
a. Your real wage increased.
b. Your nominal wage decreased.
c. Both your nominal and real wages decreased.
d. Although your nominal wage rose, your real wage decreased.
ANSWER: a
64. When the inflation rate rises, the purchasing power of nominal income:
a. remains unchanged.
b. decreases.
c. increases.
d. changes by the inflation rate minus one.
ANSWER: b
DIFFICULTY: Easy
65. Which of the following is correct?

a. People whose nominal incomes rise faster than the rate of inflation gain purchasing power.
b. Real income equals nominal income divided by the CPI as a decimal.
c. The percentage change in real income equals the percentage change in nominal income minus the percentage
change in CPI.
d. All of these.
ANSWER: d
66. Real income for a given year would be less than nominal income in that year if:
a. the consumer price index was less than 100 in that year.
b. nominal income in that year was greater than nominal income in the previous year.
c. nominal income in that year was less than nominal income in the previous year.
d. the consumer price index was greater than 100 in that year.
ANSWER: d
67. Last year the Jones family earned $40,000. This year their income is $42,000. In an economy with an inflation rate of
10 percent, which of the following is correct?
a. The Jones' nominal income and real income have both fallen.
b. The Jones' nominal income and real income have both risen.
c. The Jones' nominal income has increased and their real income has fallen.
d. The Jones' nominal income has decreased and their real income has risen.
ANSWER: c
68. Real income in Year X is equal to:

a.
b.
c.
d. Year X nominal income × CPI.

ANSWER: c
69. The CPI (using a 2000 base year) for 1965 is 26.0. Suppose a household's annual take-home pay in 1965 was $8,320.
What would be an equivalent home pay in 2000?
a. $10,483.
b. $21,632.
c. $23,680.
d. $32,000.
ANSWER: d
70. Suppose your nominal income this year is 5 percent higher than last year. If the inflation rate for the period was 3
percent, then your real income was:
a. increased by 1.67 percent.
b. increased by 2 percent.
c. increased by 8 percent.
d. decreased by 0.6 percent.
ANSWER: b
71. Last year the Olsen family earned $70,000. This year their income is $77,000. In an economy with an inflation rate of
8 percent, we can conclude that the Olsen's nominal income:
a. and real income both increased.
b. and real income both decreased.
c. increased, but their real income decreased.
d. decreased, but their real income increased.
ANSWER: a
72. If the nominal interest rate is 5 percent and there is no inflation, then the real interest rate:

a. exceeds 5 percent.
b. is less than 5 percent.
c. is 5 percent.
d. is zero.
ANSWER: c
73. The real interest rate can be expressed as the:

a. nominal interest rate minus the real interest rate.
b. inflation rate minus the nominal interest rate.
c. nominal interest rate minus the inflation rate.
d. nominal interest rate plus the inflation rate.
ANSWER: c
74. If the rate of inflation in a given time period turns out to be higher than lenders and borrowers anticipated, then the
effect will be:
a. a redistribution of wealth from borrowers to lenders.
b. a net gain in purchasing power for lenders relative to borrowers.
c. no change in the distribution of wealth between lenders and borrowers.
d. none of these.
ANSWER: d
75. The real interest rate is defined as the:

a. actual interest rate.
b. fixed-rate on consumer loans.
c. nominal interest rate minus the inflation rate.
d. expected interest rate minus the inflation rate.
ANSWER: c
DIFFICULTY: Easy
76. If the inflation rate exceeds the nominal rate of interest,

a. the real interest rate is negative.
b. lenders lose.
c. savers lose.
d. all of these.
ANSWER: d
77. If the rate of inflation in a given time period turns out to be lower than lenders and borrowers anticipated, then the
effect will be:
a. a redistribution of wealth from borrowers to lenders.
b. a redistribution of wealth from lenders to borrowers.
c. a net loss in purchasing power for lenders relative to borrowers.
d. a net gain in purchasing power for borrowers relative to lenders.
ANSWER: a
78. If the rate of inflation in a given time period turns out to be higher than lenders and borrowers anticipated, then the
effect will be:
a. no change in the distribution of wealth between lenders and borrowers.
b. a net gain in purchasing power for lenders relative to borrowers.
c. a redistribution of wealth from borrowers to lenders.
d. a redistribution of wealth from lenders to borrowers.
ANSWER: d
79. Assume that the real rate of interest is 5 percent and a lender charges a nominal interest rate of 15 percent. If a
borrower expects that the rate of inflation next year will be 10 percent and the actual rate of inflation next year is 12
percent:
a. neither the borrower nor the lender benefits from inflation.
b. both the borrower and the lender lose from inflation.
c. the borrower benefits from inflation, while the lender loses from inflation.
d. the lender benefits from inflation, while the borrower loses from inflation.
ANSWER: c
80. Assume that the real rate of interest is 5 percent and a lender charges a nominal interest rate of 15 percent. If a
borrower expects that the rate of inflation next year will be 10 percent and the actual rate of inflation next year is 10
percent,
a. the lender benefits from inflation, while the borrower loses from inflation.
b. the borrower benefits from inflation, while the lender loses from inflation.
c. neither the borrower nor the lender benefits from inflation.
d. both the borrower and the lender lose from inflation.
ANSWER: c
81. Suppose you place $10,000 in a retirement fund that earns a nominal interest rate of 8 percent. If you expect inflation
to be 5 percent or lower, then you are expecting to earn a real interest rate of at least:
a. 1.6 percent.
b. 3 percent.
c. 4 percent.
d. 5 percent.
ANSWER: b
82. Consider borrowers and lenders who agree to loans with fixed nominal interest rates. If inflation is higher than what
the borrowers and lenders expected, then who benefits from lower real interest rates?
a. Only the borrowers benefit.
b. Only the lenders benefit.
c. Both borrowers and lenders benefit.
d. Neither borrowers nor lenders.
ANSWER: a
83. Demand-pull inflation is associated with:

a. decreasing total spending (demand).
b. increasing total spending (demand).
c. decreasing costs of production (supply).
d. increasing costs of production (supply).
ANSWER: b
DIFFICULTY: Easy
TOPICS: Demand-Pull And Cost-Push Inflation
84. A dramatic and sustained increase in oil prices would most likely:
a. increase demand-pull inflation.
b. decrease demand-pull inflation.
c. increase cost-push inflation.
d. decrease cost-push inflation.
ANSWER: c
DIFFICULTY: Easy
85. Demand-pull inflation is due to:

a. minimum wage laws.
b. labor cost increases.
c. excess total spending.
d. tax increase.
ANSWER: c
DIFFICULTY: Easy
86. Demand-pull inflation occurs:

a. at or close to full employment.
b. because of excess total spending.
c. when "too much money is chasing too few goods."
d. all of these.
ANSWER: d
87. The likely result of an economy operating at full employment is:

a. cost-push inflation.
b. demand-pull inflation.
c. a lower rate of growth.
d. hyperinflation.
ANSWER: b
DIFFICULTY: Easy
88. Which of the following can create demand-pull inflation?

a. Excessive aggregate spending.
b. Sharply rising oil prices.
c. Higher labor costs.
d. Recessions and depressions.
ANSWER: a
DIFFICULTY: Easy
89. Suppose the Organization of Petroleum Exporting Countries (OPEC) sharply increased the price of oil, which
triggered higher inflation rates in the United States. This type of inflation is best classified as:
a. pseudo-inflation.
b. demand-pull inflation.
c. cost-push inflation.
d. hyperinflation.
ANSWER: c
DIFFICULTY: Easy
90. Cost-push inflation is due to:

a. "too much money chasing too few goods".
b. the economy operating at full employment.
c. increases in production costs.
d. all of these.
ANSWER: c
DIFFICULTY: Easy
91. Which of the following statements is true?

a. Demand-pull inflation is caused by excess total spending.
b. Cost-push inflation is caused by an increase in resource costs.
c. If nominal interest rates remain the same and the inflation rate falls, real interest rates increase.
d. If real interest rates are negative, lenders incur losses.
e. All of these.
ANSWER: e
92. Cost-push inflation is due to:

a. labor cost increases.
b. energy cost increases.
c. raw material cost increases.
d. all of these.
ANSWER: d
DIFFICULTY: Easy
93. When OPEC raised the price of oil, it created a:

a. demand-pull inflation.
b. cost-push inflation.
c. demand-push inflation.
d. cost-pull inflation.
e. cost-push deflation.
ANSWER: b
DIFFICULTY: Easy
94. Which of the following correctly describes a wage-price spiral?

a. An increase in nominal wages causes inflation, and inflation causes workers to demand even higher
wages in order to keep their real income constant. This cycle can repeat itself.
b. An increase in real wages due to growth in worker productivity causes inflation, which in turn
increases worker productivity.
c. A decrease in prices causes workers to demand higher wages, which in turn puts additional
downward pressure on prices.
d. None of the above.
ANSWER: a
95. Hyperinflation refers to a situation in which:

a. prices are rising extremely rapidly.
b. prices are falling extremely rapidly.
c. the price level is extremely high.
d. the price level is extremely low.
ANSWER: a
DIFFICULTY: Easy
96. During periods of hyperinflation, which of the following is the most likely response of consumers?
a. Save as much as possible.
b. Spend money as fast as possible.
c. Invest as much as possible.
d. Lend money.
ANSWER: b
97. Inflation refers only to rising prices at a given time period.

a. True
b. False
ANSWER: False
DIFFICULTY: Easy
98. Inflation occurs when there is an increase in the purchasing power of money.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
99. During periods of inflation, all prices of all products are rising.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
100. Inflation was a major problem in the United States during the early years of the Great Depression.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
101. During periods of inflation, the general price level of goods and services in the economy rises.
a. True
b. False
ANSWER: True
DIFFICULTY: Easy
102. The consumer price index (CPI) is a number that measures movements in the average (general) level of prices.
a. True
b. False
ANSWER: True
DIFFICULTY: Easy
103. The consumer price index (CPI) is computed as the ratio of nominal GDP to real GDP.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
104. The consumer price index (CPI) includes only a market basket of goods and services purchased by the typical urban
consumer.
a. True
b. False
ANSWER: True
DIFFICULTY: Easy
105. Suppose the consumer price index (CPI) for a given year is 150. This means the rate of inflation for the given year is
50 percent.
a. True
b. False
ANSWER: False
106. Unlike the GDP deflator, the CPI does not consider goods and services purchased by business and government.
a. True
b. False
ANSWER: True
107. A consumer price index of 110 for a given year indicates that prices in that year are 10 percent higher than prices in
the base year.
a. True
b. False
ANSWER: True
108. A sustained decrease in the price level is known as deflation.

a. True
b. False
ANSWER: True
DIFFICULTY: Easy
109. Disinflation and deflation mean a decrease in the average price level.
a. True
b. False
ANSWER: False

110. If consumers reduce the purchase of goods whose relative prices rise (substitution bias), the consumer price index
(CPI) will tend to have an upward bias over time (overstates inflation).
a. True
b. False
ANSWER: True
111. Changes in the quality of some goods and services, such as electromechanical calculators, are thought to give a
downward bias to the consumer price index.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
112. People with fixed incomes fare best in an inflationary period.

a. True
b. False
ANSWER: False
113. During the period 1980-1986, the U.S. economy experienced disinflation.
a. True
b. False
ANSWER: True
DIFFICULTY: Easy
114. Real income is the purchasing power of nominal (money) income.

a. True
b. False
ANSWER: True
DIFFICULTY: Easy
115. Inflation reduces the purchasing power of nominal income and increases the purchasing power of fixed income.
a. True
b. False
ANSWER: False
116. The nominal rate of interest is any rate of interest below 3 percent.
a. True
b. False
ANSWER: False
117. The nominal rate of interest is equal to the real interest rate plus the inflation rate.
a. True
b. False
ANSWER: True
118. The real interest rate can be negative.

a. True
b. False
ANSWER: True
DIFFICULTY: Easy
119. The real interest rate is the annual percentage amount of money that is earned on a sum loaned or deposited in a
bank.
a. True
b. False
ANSWER: False
TOPICS: Demand-Pull and Cost-Push Inflation
120. Demand-pull inflation is typically caused by rapidly rising costs of production.

a. True
b. False
ANSWER: False
DIFFICULTY: Easy
121. Demand-pull inflation occurs during a period of time in which total spending is increasing less than total output
(GDP) is increasing.
a. True
b. False
ANSWER: False
122. Demand-pull inflation is most pronounced during a recession (as opposed to the recovery phase of the business
cycle).
a. True
b. False
ANSWER: False
123. Demand-pull inflationary pressure increases as the economy approaches full employment.
a. True
b. False
ANSWER: True
DIFFICULTY: Easy
124. Demand-pull inflation happens during periods of full employment in the business cycle when demand for goods and
services is growing faster than supply.
a. True
b. False
ANSWER: True
DIFFICULTY: Easy
125. Cost-push inflation is a result of an increase in the per unit costs of production.
a. True
b. False
ANSWER: True
DIFFICULTY: Easy
126. Cost-push inflation is caused by too much money chasing too few goods.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
127. Cost-push inflation happens when technological innovation unexpectedly lowers the cost of production, causing
increased demand for goods and services.
a. True
b. False
ANSWER: False
128. Inflation psychosis and wage-price spirals are two types of hyperinflation.
a. True
b. False
ANSWER: True
129. What are some criticisms of the CPI as a measure of inflation?

ANSWER: The CPI is criticized as a measure of inflation because it may not be representative of all
consumers, it can incorrectly adjust for quality changes, and it can ignore the relationship
between price changes and the importance of items in the market basket.
130. How is inflation typically measured? What are the different types of inflation? Why is it important to know which
type of inflation we may be experiencing?
ANSWER: Inflation is typically measured by the CPI. The two types of inflation are demand-pull and
cost-push. Demand-pull inflation is characterized by "too many dollars chasing too few
goods and service." Demand-pull inflation is caused by total spending increasing faster
than real GDP. Cost-push inflation is caused by anything that increases costs of production.
Knowing which type of inflation we may be suffering from is important because each type
of inflation requires a different policy prescription to combat.
131. Who is hurt and who benefits from inflation? Why?

ANSWER: Inflation hurts those on fixed incomes and those that save at fixed nominal rates of interest.
Inflation benefits those who borrow at fixed nominal rates of interest and those whose
wealth increases faster than the rate of inflation.

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Ebook Economics For Today 9Th Edition Tucker Test Bank Full Chapter PDF

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Economics For Today 9th Edition

Tucker Test Bank

2. The best definition of inflation is a(n):

4. Which of the following is true of inflation?

5. Inflation is an increase in:

6. Inflation is defined as an increase in:

8. Inflation is measured by an increase in:

9. An increase in the general price level is termed:

11. Losers from inflation include:

Cengage Learning Testing, Powered by Cognero Page 3

14. Those hurt by inflation include:

15. Which one of the following groups benefits from inflation?

16. In periods of high inflation,

17. Which of the following is true about inflation?

Cengage Learning Testing, Powered by Cognero Page 4

Cengage Learning Testing, Powered by Cognero Page 6

34. The consumer price index (CPI):

Cengage Learning Testing, Powered by Cognero Page 8

40. The Consumer Price Index compares the:

Exhibit 7-1 Consumer Price Index

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Exhibit 7-2 Consumer Price Index

Cengage Learning Testing, Powered by Cognero Page 12

54. Deflation refers to a:

55. Deflation means a decrease in:

59. A reduction in the rate of inflation is called:

60. Disinflation means a decrease in:

62. A worker would be hurt least by inflation when the:

65. Which of the following is correct?

68. Real income in Year X is equal to:

d. Year X nominal income × CPI.

Cengage Learning Testing, Powered by Cognero Page 17

73. The real interest rate can be expressed as the:

75. The real interest rate is defined as the:

76. If the inflation rate exceeds the nominal rate of interest,

83. Demand-pull inflation is associated with:

85. Demand-pull inflation is due to:

86. Demand-pull inflation occurs:

87. The likely result of an economy operating at full employment is:

88. Which of the following can create demand-pull inflation?

90. Cost-push inflation is due to:

91. Which of the following statements is true?

92. Cost-push inflation is due to:

93. When OPEC raised the price of oil, it created a:

94. Which of the following correctly describes a wage-price spiral?

95. Hyperinflation refers to a situation in which:

97. Inflation refers only to rising prices at a given time period.

108. A sustained decrease in the price level is known as deflation.

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112. People with fixed incomes fare best in an inflationary period.

114. Real income is the purchasing power of nominal (money) income.

118. The real interest rate can be negative.

120. Demand-pull inflation is typically caused by rapidly rising costs of production.

129. What are some criticisms of the CPI as a measure of inflation?

131. Who is hurt and who benefits from inflation? Why?

Cengage Learning Testing, Powered by Cognero Page 29

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