Economics 252
Review Questions Chapter 7 – Inflation
(1) Inflation means:
(a) the prices of all goods stay the same or are rising.
(b) all prices are rising.
(c) the average price level is rising.
(d) all of the above.
(2) When the price of a good is increasing more slowly than an index of average prices, then generally:
(a) the good's relative price has risen while its absolute price has fallen.
(b) the good's relative price and absolute price have fallen.
(c) the good's relative and absolute price have fallen.
(d) the good's relative price has fallen while its absolute price has risen.
(3) If inflation is 20 percent per year and you receive a 10 percent raise in income, then your:
(a) real and nominal income both fall.
(b) real and nominal income both rise.
(c) real income falls, but nominal income rises.
(d) real income rises, but nominal income falls.
(4) Those who suffer from money illusion:
(a) recognize when their real income changes.
(b) are those who wish to have a COLA clause in their employment contract.
(c) confuse changes in nominal income with changes in real income.
(d) require compensation in any contract they sign to cover inflationary changes that could adversely affect their economic outcomes.
(5) Inflation affects production decisions because it:
(a) increases employment.
(b) reduces speculation.
(c) causes businesses to focus more on the future.
(d) causes businesses to be more cautious since the future is uncertain.
(6) The Consumer Price Index (CPI) is a measure of the:
(a) index used to compare real GDP from nominal GDP.
(b)
change in the average price of shipments of goods and services in the
(c) average price of consumer goods and services in the current period relative to their price in some base period.
(d) annual inflation rate in the producer goods market.
(7) Assume the CPI increases from 100 to 110 and that a person's nominal income increases from $20,000 to $22,000 over the same period. This person' real income has:
(a) increased by 5 percent.
(b) increased by 10 percent.
(c) increased by 20 percent.
(d) remained the same.
(8) At the beginning of 1995 the CPI was 148.2. At the end of 1995 it was 152.4. What was the rate of inflation during 1995?
(a) 4.2 percent.
(b) 6.1 percent.
(c) 2.8 percent.
(d) 3.9 percent.
(9) The best price index to use in calculating the real GDP would be:
(a) any of the indexs since they all reflect price level changes.
(b) the CPI.
(c) the PPI.
(d) the GDP deflator.
(10) If nominal GDP is $7,636 billion and the GDP deflator is 130.2, then real GDP is:
(a) $7,383. billion.
(b) $57.6 billion
(c) $5,864.8 billion.
(d) $9,926.8 billion.
(11) Which of the following automatically adjusts some nominal wages to changes in price indexes?
(a) COLA
(b) CPI
(c) GDP deflator.
(d) PPI
(12) If the nominal interest rate is 7 percent and the inflation rate is 10 percent, the real interest rate is:
(a) -3 percent.
(b) 3 percent.
(c) 17 percent.
(d) 7 percent.