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Inflation Question and Answers
1. If the economy is producing at capacity and consumers are willing and able to buy more, this may cause
A. Demand-pull inflation.
B. Cost-push inflation.
C. Supply-side inflation.
D. The price effect.
Excess demand that results in an increasing price level is known as demand-pull inflation.
2. If OPEC raises the price of oil and production costs increase, this may cause
A. Cost-push inflation.
B. Demand-pull inflation.
C. Hyperinflation.
D. Super-pull inflation.
Cost-push inflation occurs when input costs rise, leading producers to raise prices to maintain profitability.
3. All of the following are microeconomic consequences of inflation except
A. A price effect.
B. An income effect.
C. A wealth effect.
D. A profit effect.
Prices, incomes, and wealth change due to changes in inflation, while profit is based more on the difference in
revenue and cost, and there is no profit effect.
4. Your real income is
A. The amount of money you receive during a given time period.
B. Measured in current dollars.
C. The purchasing power of the money you receive.
D. The same as your nominal income in times of high inflation.
Real income is a measure of how much your income will allow you to purchase in goods and services.
5.
Based on Table 7.1, the rate of inflation between 2002 and 2003 using the CPI was
A. 1.5 percent.
B. 2.2 percent.
C. 6.2 percent.
D. 4.1 percent.
The inflation rate is equal to the difference in the price index divided by the CPI in 2002.
6.
Based on Table 7.1, the rate of inflation between 2003 and 2004, using the GDP deflator, was
A. 2.4 percent.
B. 2.9 percent.
C. 6.2 percent.
D. 4.1 percent.
The inflation rate is equal to the difference in the price index divided by the GDP deflator in 2003. % change in the
GDP price index (112.1 - 109.1) / 109.1 = 0.029 = 2.9%
7.
Based on Table 7.1, the real GDP for 2003 was
A. $4,832.0 billion.
B. $6,811.7 billion.
C. $6,584.2 billion.
D. $6,984.1 billion.
Real GDP can be calculated by dividing the nominal GDP by the GDP deflator and then multiplying the result by
100.
8.
Based on Table 7.1, the real GDP for 2004 was
A. $4,970.3 billion.
B. $6,811.7 billion.
C. $6,584.2 billion.
D. $6,984.1 billion.
One can calculate real GDP by dividing the nominal GDP by the GDP deflator and then multiplying the result by
100.
9.
Based on Table 7.2, the rate of inflation between 2001 and 2002 using the CPI was
A. 2.65 percent.
B. 2.58 percent.
C. 3.40 percent.
D. 2.02 percent.
The inflation rate can be calculated by taking the difference in the CPI values and dividing the result by the value
of the CPI in 2001.
10.
Based on Table 7.2, the rate of inflation between 2002 and 2003, using the GDP deflator, was
A. 1.62 percent.
B. 2.68 percent.
C. 4.91 percent.
D. None of the other choices.
The inflation rate using the GDP deflator is calculated by taking the difference in the GDP deflator values and
dividing the result by the value of the GDP deflator in 2001.
11.
Based on Table 7.2, the real GDP for 2002 was
A. $7,749.0 billion.
B. $4,783.6 billion.
C. $5,122.0 billion.
D. $8,297.1 billion.
The real GDP can be determined by dividing the nominal GDP by the GDP deflator and then multiplying the
result by 100.
12.
Based on Table 7.2, the real GDP for 2003 was
A. $8,588.4 billion.
B. $4,981.7 billion.
C. $9,282.0 billion.
D. $5,384.0 billion.
Real GDP can be determined by dividing the nominal GDP by the GDP deflator and then multiplying the result by
100.
13. Assuming that the following table describes a typical consumer’s complete budget, compute the item weights for
each product.
Item
Quantity
Coffee
20 pounds
Unit Price
$5
Tuition
1 year
4,000
Pizza
150 pizzas
DVD rental
75 days
2
Vacation
1 week
250
10
Answer: Feedback: Calculate the total for each product. Divide each total by the total budget ($6,000) to calculate
the item weight.
Item
Coffee
Tuition
Pizza
DVD rental
Vacation
Quantity
20
1
150
75
1
Unit Price
$5
$4,000
$10
$2
$250
Total Budget
Total (P x Q)
$100
$4,000
$1,500
$150
$250
$6,000
Item Weight
0.017
0.667
0.250
0.025
0.042
14. Suppose the prices listed in the table for Problem 13 changed from one year to the next, as shown here. Use the rest of
the table to compute the average inflation rate.
Item
Coffee
Tuition
Pizza
DVD
rental
Vacatio
n
Quantity
20
1
150
75
1
Unit Price
Unit Price
Total Last
Total This % Change
Last Year
Inflation
Last Year
This Year
Year
Year
in Price
Item Weight Impact
$5
$6
$100
$120
20%
0.017
0.33%
$4,000
$5,000
$4,000
$5,000
25%
0.667
16.67%
$10
$12
$1,500
$1,800
20%
0.250
5.00%
$2
$1
$150
$75
-50%
0.025
-1.25%
$250
$300
Total
Budget
$250
$6,000
$300
$7,295
20%
0.042
Average
Inflation
0.83%
21.58%
Feedback: After calculating the totals for each year, calculate the percentage change in price ((New price – Old price)/Old
price). Multiply those percentages by the weight (from Problem 13) of the item to calculate the impact of inflation. Sum the
impacts of inflation for all products to calculate average inflation. The relative importance of a product in consumer
budgets is reflected in its item weight. Item weight is the percentage of total expenditure spent on a specific product.
The impact on inflation refers to the impact of the price change of a specific good on inflation that is the percentage change
in inflation. The impact on inflation of a price change for a specific good is calculated as follows:
Impact on inflation = Percentage change in inflation = Item weight times Percentage change in price of item.