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Chapter 13 Practice Quiz Tutorial

Inflation

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1. Inflation is a. an increase in the general price level.b. not a concern during war.c. a result of high unemployment.d. an increase in the relative price level.

A. Inflation is always a concern and it is not caused by a high unemployment rate.

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2. If the consumer price index in year X was 300 and the CPI in Year Y was 315, the rate of inflation was a. 5 percent.b. 15 percent.c. 25 percent.d. 315 percent.

A. CPI = [315 - 300 / 300] x 100 = 5%

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3. Consider an economy with only two goods: bread and wine. In 1982, the the typical family bought 4 loaves of bread at 50 cents per loaf and two bottles of wine for $9 per bottle. In 1996, bread cost 75 cents per loaf, and wine cost $10 per bottle. The CPI for 1996 (using a 1982 base year) isa. 100.b. 115.c. 126.d. 130.

B.

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CPI =CYPBYP

*CYP = cost of the market basket of products at current-year prices

*BYP = cost of the market basket of products at base-year prices

X 100

$23$20

X 100115 =

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Year

12345

CPI

100110115120125

Exhibit 13-5

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4. As shown in Exhibit 13-5, the rate of inflation for Year 2 is a. 5 percent.b. 10 percent.c. 20 percent.d. 25 percent.

B. A percent increase of decrease between two numbers is the difference divided by the original number. In this case, it is 10 / 100 = 10%

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5. As shown in Exhibit 13-5, the rate of inflation for Year 5 is a. 4.2 percent.b. 5 percent.c. 20 percent.d. 25 percent.

A. A percent increase or decrease between two numbers is the difference divided by the original number. In this case, it is 5 / 120 = 4.2%

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6. Deflation is a (an): a. increase in most prices.b. decrease in the general price level.c. situation that has never occurred in

U.S. history.d. decrease in the inflation rate.

B. Inflation is an increase in most prices and deflation did occur in the U.S. during the Great Depression of the 1930’s.

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7. Which of the following would overstate the consumer price index? a. Substitution bias.b. Improving quality of products.c. Neither (a) nor (b).d. Both (a) and (b).

D. Substitution bias refers to the law of demand in which people buy less when the price rises. However, the CPI is based on a fixed market basket. Since improving quality is difficult to measure increases in the CPI overstate inflation.

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8. Suppose a typical automobile tire cost $50 in the base year and had a useful life of 40,000 miles. Ten years later the typical automobile tire cost $75 and had a useful life of 75,000 miles. If no adjustment is made for mileage, the CPI would a. underestimate inflation between the two

years.b. overestimate inflation between the two

years.c. accurately measure inflation between the

two years.d. not measure inflation in this case.

B. Quality changes are difficult to measure. When the quality of items improves, increases in the CPI overstate the change in prices.

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9. 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.

nominal incomeCPI ÷ 100

B. Real income =

A larger value for the CPI decreases nominal

income.

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-1%

10. Last year the Harrison family earned $50,000. This year their income is $52,000. In an economy with an inflation rate of 5 percent, which of the following is correct? a. The Harrison’s nominal income and real income

have both risen.b. The Harrison’s nominal income and real income

have both fallen.c. The Harrison’s nominal income has fallen, and

their real income has risen.d. The Harrison’s nominal income has risen, and

their real income has fallen.

52,000 - 50,00050,000

- 5%,

4% - 5% =

D. % change real income

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11. If the nominal rate of interest is less than the inflation rate, a. lenders win.b. savers win.c. the real interest rate is negative.d. the economy is at full employment.

C. The real rate of interest is negative because the lender is receiving less money back, in real terms, than was lent out.

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12. Demand-pull inflation is caused by a. monopoly power.b. energy cost increases.c. tax increases.d. full employment.

D. Demand-pull inflation is caused by an excess of total spending (demand) at or close to full employment. At full employment, sellers cannot respond by raising prices.

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13. Cost-push inflation is due to a. excess total spending.b. too much money chasing too few goods.c. resource cost increases.d. the economy operating at full employment.

C. Answers a, b, and d describe demand-pull inflation.

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END