20) When wages or benefits are automatically increased based on the reported inflation rate, it is
called the ________ adjustment.
A) natural flow of money
B) cost-of-living
C) change in exports
D) change in imports
21) Social security payments automatically increase when the CPI goes up because of the
A) age of the recipient.
B) years receiving social security.
C) cost-of-living adjustments.
D) individual being married or unmarried.
Recall the Application about the time involved in including cell phones in the calculation of
the CPI to answer the following question(s).
22) Recall the application. Cell phones were introduced to the public in 1983, but it took the
Bureau of Labor Statistics ________ to include them in calculating the CPI.
A) 3 years
B) 7 years
C) 15 years
D) 24 years
23) Recall the application. The failure of including cell phones in a timely manner when
calculating the CPI caused the telecommunications component of the price index
A) to be biased downward.
B) to be biased upward.
C) to actually register no perceptible bias.
D) to become negative.
24) Recall the application. The bias in the CPI would be ________ if new goods are ________
incorporated in CPI calculations.
A) smaller; quickly
B) greater; immediately
C) smaller; slowly
D) negligible; slowly
25) Recall the application. As new products are constantly invented and introduced on the
market,
A) the bias in the CPI can be large.
B) the bias in the CPI tends to become smaller.
C) the bias in the CPI will eventually disappear.
D) the bias in the CPI will remain virtually unchanged.
26) The basket of goods measured in computing the CPI includes goods produced in prior years
and imported goods.
27) Most economists believe that the CPI overstates the actual changes in prices while the chain
index for GDP understates them.
28) What is the Consumer Price Index (CPI)?
29) What is a “cost-of-living” adjustment?
30) Why do both the chain-weighted index for GDP and the CPI overstate actual price increases?
31) How costly are biases in the CPI?
12.5 Inflation
1) The percentage rate of change in the price level is called the
A) chain-weighted price index.
B) Consumer Price Index.
C) rate of inflation.
D) rate of absorption.
2) Suppose that a price index in Paraguay was 131 in 2011 and 152 in 2012. The inflation rate
between those two years was approximately
A) 10.5%.
B) 11.6%.
C) 16%.
D) 21%.
3) Suppose that the CPI in Thailand was 345 in 2011 and 388 in 2012. The inflation rate between
those two years was approximately
A) 11.2%.
B) 14.3%.
C) 12.5%.
D) 43%.
4) Suppose that the chain-weighted index for GDP in Panama was 180 in 2011 and 188 in 2012.
The inflation rate between those two years was approximately
A) 1.1%.
B) 4.4%.
C) 8%.
D) 10.4%.
5) Suppose that a price index in Latvia was 120 in 2011 and 150 in 2012. The inflation rate
between those two years was approximately
A) 8%.
B) 12.5%.
C) 25%.
D) 30%.
6) Suppose that the chain-weighted index for GDP in Gambia was 275 in 2011 and 350 in 2012.
The inflation rate between those two years was approximately
A) 20.2%.
B) 27.3%.
C) 37.5%.
D) 75%.
7) Suppose that the CPI in Egypt was 111 in 2011 and 122 in 2012. The inflation rate between
those two years was approximately
A) 4.8%.
B) 5.5%.
C) 9.9%.
D) 11%.
8) Suppose that in 2011 the chain-weighted price index for GDP in Estonia is 220 and the chain-
weighted price index in Lithuania is 160. In 2012 the price index in Estonia is 242 and the price
index in Lithuania is 180. You could conclude that
A) Estonia is a more expensive place to live than Lithuania.
B) Lithuania is a more expensive place to live than Estonia.
C) Estonia’s rate of inflation is higher than Lithuania’s.
D) Lithuania’s rate of inflation is higher than Estonia’s.
9) In the United States during the 1950s and 1960s
A) the inflation rate was frequently less than 2% a year.
B) prices fell.
C) prices rose sharply.
D) there was zero inflation.
10) The biggest problem caused by a deflation is that
A) prices fall.
B) wages fall.
C) people cannot repay their debts.
D) interest rates rise.
11) Inflation must be high in Moscow because it is very expensive to live there.
12) Since the 1930s the United States has experienced continuous deflation.
13) Critically evaluate the statement “Honolulu is an expensive place to live. Therefore the
inflation rate must be high in Honolulu.”
14) Explain why deflation could prevent people from being able to repay their debts.
12.6 The Costs of Inflation
1) Economists call the physical cost of changing prices
A) the cost of doing business.
B) menu costs.
C) inflationary sufferage.
D) increasing profits.
2) On what kind of income is our tax system based?
A) real
B) nominal
C) adjusted
D) inflationary
3) The costs associated with recalculating prices and printing new price lists when there is
inflation are known as
A) shoe leather costs.
B) menu costs.
C) chain-index costs.
D) diminishing costs.
4) The costs of inflation that arise from trying to reduce cash holdings are known as
A) shoe leather costs.
B) menu costs.
C) chain-index costs.
D) diminishing costs.
5) What happens to your purchasing power if inflation is less than you anticipated?
A) It decreases.
B) It increases.
C) It devalues your net worth.
D) It won’t change much.
6) If you negotiated a salary based on an anticipated inflation rate of 4%, and the actual inflation
rate turned out to be 6%
A) the purchasing power of your real wages would be more than you anticipated.
B) your employer would have gained at your expense.
C) your real wage will increase, but your nominal wage will decrease.
D) the purchasing power of your wages will not change, since purchasing power is based on your
nominal wage.
7) If you take out a bank loan prior to unanticipated inflation
A) it will be harder for you to repay the loan because of the inflated dollar.
B) you will gain at the expense of your bank.
C) your bank will gain at your expense.
D) neither you nor your bank will be affected, because the loan was made prior to the inflation.
8) One cost of unanticipated inflation is
A) both lenders and borrowers lose.
B) arbitrary redistributions of income.
C) nominal income falls below real income.
D) people cannot repay their debts.
9) In November 2008, the MONTHLY rate of inflation in Zimbabwe approached 79
BILLION%. An inflation rate such as this would
A) seriously disrupt normal commerce.
B) decrease the natural rate of unemployment.
C) be too high to calculate using the CPI.
D) all of the above
10) An inflation rate that exceeds 50% per month is referred to as
A) anticipated inflation.
B) destructive deflation.
C) hyperinflation.
D) superflation.
11) Hyperinflation is defined as an inflation rate
A) that doubles each year.
B) that exceeds 50% per month.
C) that increases rapidly in one year and decreases rapidly the next year.
D) that is moderately high but anticipated.
12) Anticipated inflation is associated with cost increases which are fully expected.
13) Unanticipated inflation is associated with cost increases which are not expected.
14) Inflation distorts the operation of our tax and financial system.
15) Hyperinflation refers to an inflation rate which exceeds 5% per month.
16) Unemployment and recessions are sometimes necessary to curb high inflation.
17) Explain menu costs and shoe leather costs as they relate to inflation.
18) What is hyperinflation?