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Test Bank For Macroeconomics For Today 10th Edition Irvin B Tucker
Test Bank For Macroeconomics For Today 10th Edition Irvin B Tucker
Tucker
Chapter 17 - Inflation
1. The best definition of inflation is a(n):
a. decrease in the general price level.
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
2. 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
3. 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
4. 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. Inflation has a larger effect on your standard of living than on the average consumer.
ANSWER: c
5. 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
6. 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.
Chapter 17 - Inflation
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
7. 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
8. 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
9. 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
11. 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
12. Suppose we shopped for a basket of goods in Year 1 and it cost $350. Suppose the same basket of goods adds up to
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Chapter 17 - Inflation
$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.
ANSWER: d
Consumer
Year Price Index
1 100
2 110
3 115
4 120
5 125
13. 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
14. As shown in Exhibit 7-1, the rate of inflation for Year 5 is:
a. 4.2 percent
b. 5 percent.
c. 20 percent.
d. 25 percent.
ANSWER: a
15. 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
16. 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?
a. substitution bias
b. transportation bias
c. quality bias
d. indexing bias
ANSWER: a
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Chapter 17 - Inflation
17. 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
18. 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
20. 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. Decreased by $5,000.
d. Decreased by $3,333.
ANSWER: b
21. 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
23. 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?
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Chapter 17 - Inflation
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.
24. 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.
ANSWER: c
26. 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.
ANSWER: a
27. Union contracts with built-in cost-of-living adjustments and home mortgages that vary with the rate of inflation are:
a. examples of failed policies of the 1970s.
b. examples of bracket creep.
c. means of implementing fiscal policy.
d. steps that can be taken to decrease the adverse impacts of inflation.
ANSWER: d
Chapter 17 - Inflation
31. 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
32. 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
33. 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
34. 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
35. 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.
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Chapter 17 - Inflation
What would be an equivalent take-home pay in 2000?
a. $10,483.
b. $21,632.
c. $23,680.
d. $32,000.
ANSWER: d
36. 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
37. 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
38. 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
40. 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.
Chapter 17 - Inflation
ANSWER: c
41. 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
42. 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
43. 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
Chapter 17 - Inflation
47. 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
52. 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
Chapter 17 - Inflation
53. 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. excess total spending.
ANSWER: c