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File: Chapter 34 Inflation and the Phillips Curve
True or False
[QUESTION]
1. Asset price inflation occurs when the prices of assets rise.
2. The prices of assets are included in standard measures of inflation.
3. It’s difficult to measure asset inflation because asset prices can increase when assets become
more productive.
4. Inflation redistributes income from people who do not raise their prices to people who do
raise their prices.
5. Inflation has both benefits and costs.
6. Asset inflation tends to hurt those who save in risky assets.
7. Economists who accept the quantity theory of money believe that inflation is always and
everywhere a monetary phenomenon.
8. Economists who accept the quantity theory of money favor a monetary rule because they
believe the short-run effects of monetary policy are unpredictable and the long-run effects are on
the price level, not real output.
9. Expectations of inflation are assumed to be constant at each point on a given short-run
Phillips curve.
10. According to the Phillips curve model, when expectations of inflation increase, the same
level of unemployment will be associated with a higher rate of inflation.
11. The long-run Phillips curve shifts to the left or the right as expectations of inflation change.
12. If expectations of inflation are greater than actual inflation, the short-run Phillips curve will
eventually shift upward.
13. If global prices are lower than domestic prices, the short-run Phillips curve is likely to be
horizontal.
14. Asset inflation is when:
A. asset prices rise regardless of their real value.
B. the money supply rises leads to inflation.
C. asset prices rise more than their real value.
D. expansionary fiscal policy leads to inflation.
15. Asset inflation:
A. is equal to goods inflation.
B. is the rise in the physical increase in assets.
C. is the rise in asset prices that exceed the rise in the real value of assets.
D. does not occur when the economy faces globalization because prices are capped.
16. Asset price inflation can be a problem because it:
A. gives people the illusion that their real wealth has decreased more than it really has.
B. makes people switch their resources from risky investments to conservative investments.
C. gives people the illusion that their real wealth has increased more than it really has.
D. typically increases at the same rate as goods price inflation.
17. The usefulness of standard goods market price indexes for judging policy is limited because:
A. they include the prices of assets.
B. they include only the price of gold and silver.
C. the United States is no longer on the gold standard.
D. they do not include the price of assets.
18. Economists before the 1940s were most likely to call a rise in asset prices an inflation as
long as it is accompanied by an increase in:
A. the money supply.
B. GDP.
C. goods inflation.
D. a price index.
19. One way to measure asset inflation is to:
A. multiply the GDP deflator times nominal net worth; if it increases there is asset inflation.
B. multiply the GDP deflator times real net worth; if it increases there is asset inflation.
C. divide GDP by nominal net worth; if it increases there is asset inflation.
D. divide nominal net worth by GDP; if it increases there is asset inflation.
20. Asset inflation has a danger of:
A. obscuring goods inflation.
B. accommodating contractionary monetary policy.
C. reducing the productive capacity of assets.
D. leading to a misallocation of resources to risky investments.
21. If asset prices rise:
A. real wealth increases.
B. productive capacity increases.
C. inflation increases.
D. it is unclear whether wealth increases or inflation has occurred.
22. Asset deflation generally:
A. is more harmful than the preceding inflation was helpful.
B. is less harmful than the preceding inflation was helpful.
C. is neither good nor bad, it merely redistributes income.
D. cannot occur because people will know it will follow asset inflation.
23. Over the last twenty years, the United States had periods of considerable:
A. asset price inflation, followed by sudden spurts of asset price deflation.
B. goods price inflation, followed by sudden spurts of goods price deflation.
C. asset price deflation, followed by sudden spurts of goods price inflation.
D. asset price deflation, followed by sudden spurts of asset price inflation.
24. The effects of asset price inflation and asset price deflation generally:
A. even out.
B. have unequal effects on the economy.
C. are unrelated.
D. are addressed by policymakers.
25. A cost of inflation is that it:
A. makes everyone poorer.
B. makes the poor poorer and the rich richer.
C. reduces the informational content of prices.
D. it raises real interest rates.
26. Inflation is undesirable because it:
A. always makes the nation poorer.
B. redistributes income from those who can raise prices to those who cannot.
C. distorts the information value of prices.
D. makes everyone worse off.
27. Inflation:
A. can obscure relative price changes.
B. redistributes income from those who can raise prices to those who cannot.
C. can undermine faith in the monetary system, the economy, and the government if it is high
enough.
D. makes society poorer on average.
28. Suppose you sell surfboards for a living, expect the price of surfboards to increase at the
same rate as inflation and adjust prices accordingly. If this does not occur, then it must be true
that:
A. the price of surfboards is changing at a rate that is different from what was expected.
B. the inflation rate is different from what was expected.
C. both the price of surfboards and the inflation rate are different from what was expected.
D. the relative price of surfboards is changing.
29. If inflation is highly volatile, money is
A. more valuable because you need more of it
B. less valuable because there is less of it.
C. more valuable because its unit of account function is reduced
D. less valuable because its unit of account function is reduced.
30. If inflation is highly volatile
A. mortgage contracts will likely be more complicated
B. mortgage contracts will likely be less complicated
C. there will be no mortgage contracts
D. there will be no effect on mortgage contracts.
31. If there is inflation
A. the unit of account function of money is improved
B. the unit of account function of money is undermined.
C. the distributional function of money is improved
D. the distributional function of money is undermined.
32. Inflation
A. has only costs
B. has both benefits and costs
C. just exists; it does not have benefits or costs
D. has costs and benefits that generally offset each other.
33. Because inflation undermines money’s unit of account function, government policy will try
to keep it:
A. at zero.
B. a low rate
C. negative
D. at either a low or a negative rate.
34. Generally in the United States today, goods inflation
A. under 5% is considered acceptable
B. under 2.5% is considered acceptable
C. at zero is considered acceptable.
D. that is negative is preferable
35. Before the financial crisis of 2008,
A. the 2.5% inflation target was seen as a lower bound
B. the 2.5% inflation target was seen as an upper bound
C. the 2.5% inflation target was seen as a precise target
D. inflation was not seen as a target.
36. Currently if inflation is 2% and the goods inflation target is 2.5%, policymakers
A. congratulate themselves for coming in under their target
B. are unhappy because they have come in under their target
C. are indifferent because they don’t have an inflation target
D. are indifferent because they are more interested in asset inflation.
37. Policy makers
A. like inflation because it allows individuals to maintain illusions
B. dislike inflation because it allows individuals to maintain illusions
C. like inflation because it makes society richer
D. dislike inflation because it redistributes income
38. Inflation frees policy makers from
A. the 2.5% interest rate lower bound
B. the 2.5% growth rate bound
C. the zero interest rate lower bound
D. the zero interest rate upper bound.
39. If monetary policy makers want to target a negative interest rate, they
A. cannot do so since negative interest rates are impossible.
B. need to stop inflation before they do it
C. need to encourage inflation before they do it.
D. need to stop asset inflation before they do it.
40. With 6% inflation and a 1% nominal interest rate the real interest rate is
A. is 7%
B. 1%
C. -5%
D. 5%
41. The higher the rate of inflation, the lower the:
A. real interest rate can fall as long as it is positive
B. nominal interest rate can fall as long as it is positive
C. nominal interest rate can fall
D. real interest rate can fall
42. One reason goods inflation is preferred by policymakers is that it
A. keeps the economy away from asset inflation
B. keeps the economy away from asset deflation
C. makes people richer
D. makes people see the importance of monetary policy
43. A central policy concern about inflation is to see that it
A. does not become built into expectations
B. does not redistribute income
C. does redistribute income
D. does become built into expectations
44. In Zimbabwe inflation rose from an annual rate of 32 percent in 1998 to 100,000 percent in
early 2009. Considering only the effects of this unexpected inflation, which of the following is
most harmed by the inflation?
A. Businesses with large inventories
B. Businesses with large debts
C. Businesses with wages determined by long-term contracts
D. Businesses who had contracted to sell their services to others at fixed prices
45. In Zimbabwe inflation rose from an annual rate of 32 percent in 1998 to 100,000 percent in
early 2009. Considering only the effects of this unexpected inflation, which of the following are
helped by the inflation?
A. Debtors
B. People living on fixed pensions
C. Unemployed people
D. No one; inflation hurts everyone
46. When inflation is unexpected it tends to hurt
a. people who save money in financial institutions
b. people who borrow money from financial institutions.
c. businesses who borrow money from financial institutions.
d. people with flexible income.
47. If inflation increases unexpectedly, then:
A. borrowers tend to lose.
B. lenders tend to lose.
C. lenders and borrowers tend to gain.
D. neither borrowers nor lenders tend to lose.
48. In an unexpected inflation, lenders will generally:
A. gain relative to borrowers.
B. lose relative to borrowers.
C. neither gain nor lose relative to borrowers.
D. The effect will be totally random.
49. Governments usually accept goods inflation as long as it stays low, which for the United
States currently means around:
A. 1 to 1.5 percent
B. 2.5 to 3 percent.
C. 3.5 to 4 percent.
D. 5.5 to 6 percent.
50. The last time the United States experienced hyperinflation was:
A. during the oil crisis of the 1970s.
B. during World War II.
C. during the Civil War.
D. during the Great Depression.
51. A situation in which the price level increases at an extremely high rate is called:
A. hyperinflation.
B. disinflation.
C. inflation.
D. stagflation.
52. In a hyperinflation, the economy:
A. always collapses.
B. can continue to function but people are unwilling to hold any money.
C. can continue to function because people build expected inflation into wages and prices.
D. will slow on its own to lower inflation.
53. Inflationary expectations are important because widespread changes in inflationary
expectations affect:
A. the distribution of income.
B. relative prices.
C. actual inflation.
D. Okun's rule of thumb.
54. According to the text, if individuals base their expectations on economic models we say that
their expectations are:
A. rational.
B. historical.
C. adaptive.
D. extrapolative.
55. According to the text, if individuals base their expectations on the past we could say that
their expectations are:
A. rational.
B. historical.
C. adaptive.
D. regressive.
56. In which case will adaptive, extrapolative and rational expectations predict the same
inflation rate in the coming year?
A. Inflation is 4 percent last year, 2 percent this year, and the economist’s model predicts 3
percent.
B. Inflation is 4 percent last year, 2 percent this year, and the economist’s model predicts 0
percent.
C. Inflation is 3 percent last year, 2 percent this year, and the economist’s model predicts 4.5
percent.
D. In none of the options would the predictions be the same.
57. A basic rule of thumb to predict inflation is inflation equals:
A. real wage increases minus productivity growth.
B. productivity growth plus nominal wage increases.
C. productivity growth minus nominal wage increases.
D. nominal wage increases minus productivity growth.
58. Given the basic rule of thumb for the relationship among inflation, productivity and nominal
wage increases, if wages rise by 2 percent and productivity increases 1 percent, one would
predict inflation to be:
A. 0 percent
B. 1 percent
C. 1.5 percent.
D. 3 percent.
59. Given the basic rule of thumb for the relationship among inflation, productivity and nominal
wage increases, if wages rise by 1 percent and productivity increases 2 percent, one would
predict inflation to be:
A. -1 percent
B. 0 percent
C. 1.5 percent.
D. 3 percent.
60. Given the basic rule of thumb for the relationship among inflation, productivity and nominal
wage increases, if wages rise by 5 percent and productivity increases 3 percent, one would
predict inflation to be:
A. -1 percent
B. 0 percent
C. 1 percent.
D. 2 percent.
61. If inflation is 3 percent last year and 2 percent this year an individual who follows
extrapolative expectations, what is the inflation rate that the individual is likely to for the coming
year?
A. 0 percent
B. 1 percent
C. 3 percent.
D. 5 percent.
62. If productivity growth is 2 percent and inflation is 5 percent, on average nominal wage
increases will be:
A. 2 percent.
