Exam Prep Inflation And The Measurement Of Prices Ch7

c07: Chapter 7: Inflation and the Measurement of Prices

Learning Objectives:

LO-1: Explain the difference between the face value of money and the purchasing power of money

LO-2: Describe inflation and calculate inflation across time periods

LO-3: Describe the winners and losers from inflation

LO-4: Distinguish the sources of inflation

LO-5: Illustrate the difference between real and nominal values

1. Inflation is
   1. the rise in all prices in an economy.
   2. the rise in the general level of prices in an economy.
   3. the rise in the general level of prices of personal consumption of urban consumers.
   4. the rise in the rate of increase in all prices in an economy.

LO-2

Level: Easy

1. Purchasing power
   1. reflects the number of goods and services that can be acquired with a given amount of money.
   2. reflects the dollar value of goods and services purchased.
   3. reflects the increase of prices for goods and services.
   4. reflects the change in consumption patterns.

LO-1

Level: Moderate

1. You receive a raise of 3% at work. The rate of inflation is reported to be 5%.
   1. Your purchasing power has decreased 2%.
   2. Your purchasing power has increased 2%.
   3. Your purchasing power remains the same.
   4. Your purchasing power is not a variable and therefore is not affected.

LO-1

Level: Moderate

1. A decline in the overall prices of goods and services is
   1. disinflation.
   2. inflation.
   3. deflation.
   4. hyperinflation.

LO-2

Level: Easy

1. A slowing of the rate of price increases in the economy is
   1. disinflation.
   2. inflation.
   3. deflation.
   4. hyperinflation.

LO-2

Level: Easy

1. Which of the following is not a role of money?
   1. Unit of account
   2. Store of value
   3. Medium of exchange
   4. Unit of standard

LO-1

Level: Easy

1. When you use money to compare value it is used as
   1. a store of value.
   2. a medium of exchange.
   3. a unit of account.
   4. a unit of standard.

LO-1

Level: Easy

1. Fiat money is
   1. money that has value because of government law or regulation.
   2. money because it is backed by gold or silver.
   3. money because of tradition and acceptance.
   4. counterfeit money.

LO-1

Level: Easy

1. When money is used to purchase a good or service it is serving the role of a
   1. unit of account.
   2. store of value.
   3. medium of exchange.
   4. unit of standard.

LO-1

Level: Moderate

1. Providing a common measure of the worth of a good is money’s role as a
   1. unit of account.
   2. store of value.
   3. medium of exchange.
   4. unit of standard.

LO-1

Level: Easy

1. Using money earned today for future purchases is money’s role as a
   1. unit of account.
   2. store of value.
   3. medium of exchange.
   4. unit of standard.

LO-1

Level: Easy

1. The measure of the average prices of a given set of goods and services over time is a(n)
   1. business cycle.
   2. reflection of consumption patterns.
   3. price index.
   4. indicator of employment levels.

LO-1

Level: Easy

1. The most widely used measure for tracking prices in the United States is the
   1. GDP Inflator.
   2. Consumer Price Index.
   3. Personal Consumption Expenditures.
   4. Producer Price Index.

LO-2

Level: Easy

1. Which of the following statements is correct?
   1. The CPI is the ratio of the cost of the market basket in the base year to the cost of the market basket in one year.
   2. The CPI is the ratio of the cost of the market basket in the base year to the cost of the market basket in one year multiplied by 100.
   3. The CPI is the ratio of the cost of the market basket in one year to the cost of the market basket in the base year.
   4. The CPI is the ratio of the cost of the market basket in one year to the cost of the market basket in the base year multiplied by 100.

LO-2

Level: Moderate

1. You decide you want to compare your average price level for what you spend on entertainment. Last year, which you decide will be the base year, your spent $50 for a concert, $15 per movie, and $25 for a dinner out. This year, these same activities cost $75, $20, and $40, respectively. Calculate your entertainment index.
   1. 1.5
   2. 150
   3. .67
   4. 66.7

LO-2

Level: Difficult

1. You decide you want to compare your average price level for what you spend on entertainment. Last year, which you decide will be the base year, your spent $50 for a concert, $15 per movie, and $25 for a dinner out. This year, these same activities cost $75, $20, and $40, respectively. Calculate your entertainment index in the base year.
   1. 1
   2. 100
   3. 1.5
   4. 150

LO-2

Level: Difficult

1. A measure used to calculate inflation is the
   1. difference in Consumer Price Index between two periods.
   2. change in the PPI between two periods.
   3. percent change in the price index between two periods.
   4. summation of the price indices between two periods.

LO-2

Level: Moderate

1. A price level of 120 means that prices have
   1. increased 120 percent since the base year.
   2. increased 20 percent since the base year.
   3. increased 0.12 percent since the base year.
   4. increased 12 times since the base year.

LO-2

Level: Moderate

1. In year 1 the Consumer Price Index was 125 and 131 in the next year. What is the rate of inflation?
   1. 4.5
   2. 4.8%
   3. 6%
   4. 6.3%

LO-2

Level: Moderate

1. If the Consumer Price Index in year 1 was 131 and the rate of inflation was 6.1% what is the Consumer Price Index in year 2?
   1. 7.86
   2. 123.5
   3. 139
   4. 209.6

LO-2

Level: Difficult

1. When inflation occurs, money saved ____________ its purchasing power and becomes a poor ____________.
   1. gains in; unit of value
   2. loses; unit of value
   3. gains in; store of value
   4. loses; store of value

LO-3

Level: Moderate

1. Consider the following sectors of an economy’s population.
2. Savers
3. Borrowers
4. People of fixed income
5. Lenders

Which of the above lose due to inflation?

• 1. i, ii ,iii
  2. i, ii ,iii, iv
  3. i, iv
  4. i, iii, iv

LO-3

Level: Moderate

1. _____________________ will benefit from inflation.
   1. Savers
   2. Borrowers
   3. Lenders
   4. People on fixed income

LO-3

Level: Easy

1. This type of inflation is a result of increases in aggregate demand.
   1. Hyperinflation
   2. Cost-push
   3. Stagflation
   4. Demand-pull

LO-4

Level: Easy

1. This type of inflation is a result of decreases in aggregate supply.
   1. Hyperinflation
   2. Cost-push
   3. Stagflation
   4. Demand-pull

LO-4

Level: Easy

1. All of the following can be identifies as a source of inflation except
   1. aggregate demand.
   2. aggregate supply.
   3. increases in the money supply.
   4. decreases in the money supply.

LO-4

Level: Easy

1. Inflation that results from an increase in any of the components of aggregate demand is
   1. demand-push inflation.
   2. demand-pull inflation.
   3. cost-push inflation.
   4. cost-pull inflation.

LO-4

Level: Easy

1. If an economy is at Point a as illustrated, which of the following can be expected?

• 1. Demand-push inflation
  2. Demand-pull inflation
  3. Cost-push inflation
  4. Cost-pull inflation

LO-4

Level: Moderate

1. Cost-push inflation can be caused by
   1. an increase in government spending.
   2. an increase in a source of raw material.
   3. a change in aggregate demand.
   4. the supply side of the market.

LO-4

Level: Easy

1. Which of the following would contribute to cost-push inflation?
   1. An increase in the costs of inputs of production
   2. An increase in the supply of inputs of production
   3. An increase in government spending
   4. An increase in income taxes

LO-4

Level: Moderate

1. The inflation experienced by the United States during the 1970s was a result of
   1. demand-push inflation.
   2. demand-pull inflation.
   3. cost-push inflation.
   4. cost-pull inflation.

LO-4

Level: Moderate

1. Values that are in current, or face, value, is known as
   1. real value.
   2. nominal value.
   3. marginal value.
   4. constant value.

LO-5

Level: Easy

1. Values that have been adjusted for inflation is known as
   1. real value.
   2. nominal value.
   3. marginal value.
   4. face value.

LO-5

Level: Easy

1. A nominal quantity is one that is measured
   1. using the GDP deflator.
   2. in current dollar value.
   3. in physical, or constant, terms.
   4. using the CPI.

LO-5

Level: Easy

1. A quantity identified in constant terms is called a _______________ quantity.
   1. real value
   2. nominal value
   3. marginal value
   4. face value

LO-5

Level: Easy

1. You are attending the same University where your grandparents attended and have just landed a job at a local retail store when your Grandfather also worked in 1972. You accept the position for a t wage of $10.00 per hour. Your Grandfather’s wage was $2.37 per hour. The CPI in 1972 was 41.8 and is 230.21 today. Real income between 1972 and today has
   1. increased.
   2. decreased.
   3. stayed the same.
   4. fluctuated.

LO-5

Level: Difficult

Essay

1. You have been offered two jobs in two different cities. The jobs are very similar in description. The first job offer is in Denver, Colorado at an annual salary of $52,000. The second job offer is for a job in Chicago, Illinois at an annual salary of $60,000. The cost of living index for Denver is 115 and 135 for Chicago. Which position will provide you the greater purchasing power?

LO-5

Level: Difficult