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Chapter 17 Tutorial
Inflation
©2000 South-Western College Publishing
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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 per cent.
b. 15 per cent.
c. 25 per cent.
d. 315 per cent.
D. As the demand curve shifts to the right along
the upward sloping supply curve, there is a
movement along the supply curve.
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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) is
a. 100.
b. 115.
c. 126.
d. 130.
B.
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*CYP = cost of the market basket of
products at current-year prices
*BYP = cost of the market basket of
products at base-year prices
CPI =
115 =
CYP
X 100
BYP
$23
X 100
$20
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Exhibit 5
Year
CPI
1
2
3
4
5
100
110
115
120
125
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4. As shown in Exhibit 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 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 of decrease between
two numbers is the difference divided by
the original number. In this case, it is 5 /
100 = 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
quality is difficult to measure, a decline
in quality understates 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
income
C. Real income =
CPI ÷ 100
A larger value for the CPI
decreases nominal
income.
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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 per cent, 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.
D. % change real income 52,000 - 50,000 - 5%,
50,000
4% - 5% = -1%
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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, then 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. none of the above.
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
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