Exam 21: The Price Level and Inflation

A) 20 percent.
B) 10 percent.
C) 4 percent.
D) 2 percent.
E) -4 percent.

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A) menu costs.
B) price confusion.
C) future price uncertainty.
D) deflationary price pressures.
E) present value/future value uncertainty.

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A) price confusion results from confusion between relative demand and inflationary pressures,whereas menu costs have to do with people confusing changes in nominal and real wages.
B) menu costs result from confusion between relative demand and inflationary pressures,whereas price confusion has to do with people confusing changes in nominal and real wages.
C) price confusion results from confusion between relative demand and inflationary pressures,whereas menu costs relate to producers changing prices,typically during inflationary periods.
D) menu costs occur during deflation,whereas price confusion problems occur during inflation.
E) menu costs only affect the food industry,whereas price confusion problems occur in high-tech industries.

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The equation used is where the two pric...

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A) the consumer price index (CPI) in Bovania is greater than in the previous year.
B) the consumer price index (CPI) in Bovania is less than in the previous year.
C) if consumers get a 4 percent pay raise,they are worse off in terms of their real income compared to inflation as measured by the Bovanian consumer price index (CPI) .
D) because milk is a necessity,consumers are automatically worse off no matter what pay increase they may have received.
E) shoe-leather costs have decreased.

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A) the price of gasoline rises.
B) a greater number of goods increase in price compared to the number of goods that undergo a price decrease.
C) the overall price level,such as the consumer price index (CPI) ,rises.
D) there is an increase in the rate of change in the price level.
E) the price of at least one good,but possibly more than one good,in the economy increases.

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A) that both real and nominal wages are rising.
B) that both real and nominal wages are falling.
C) almost none,because most wages increase at about the same rate as inflation.
D) that holding nominal wages constant,the real wage would rise.
E) that holding nominal wages constant,the real wage would fall.

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A) the CPI would definitely fall during the year in question.
B) the CPI would definitely rise during the year in question.
C) all other factors being constant,it is likely the CPI would rise during the year in question.
D) all other factors being constant,it is likely the CPI would fall during the year in question.
E) all other factors being constant,the CPI would change by about 6 percent because that is the average housing change plus the average gasoline change.

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A) the CPI will reflect upward bias.
B) the CPI will reflect downward bias.
C) consumers will experience money illusion.
D) consumers will experience a price confusion problem.
E) deflation will occur because consumers no longer buy cheeseburgers.

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A) literally mean that restaurants are the most affected by inflation because they are constantly printing new menus.
B) are best described as the costs firms incur by having to change prices either on paper or in the computer.
C) are the costs one incurs when shopping for lower prices.
D) are the costs involved with only those goods whose prices are rising faster than inflation; this basket of goods represents the "menu."
E) mean that because we can choose what goods we consume,we have a menu of inflation from which to choose and we can "opt out" by consuming a different "basket" of consumer goods.

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A) would fail to include purchases of the Zorgon for some period of time after the product entered the market.
B) would overstate the cost of the Zorgon because the price would fall over time but the CPI would always be "catching up" and be behind the price decreases.
C) would take into account substitution between the Zorgon and the use of shipping services such as FedEx and UPS as the relative price of these changed.
D) would fail to take into account the quality of the Zorgon.
E) always accurately measures the cost of living.

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A) the inflation-adjusted price of the bar would be lower in 1955 than in 1921.
B) the inflation-adjusted price of the bar would be higher in 1955 than in 1921.
C) Hershey's mispriced the bar due to a price confusion problem.
D) the United States must have experienced deflation during the period from 1921-1955.
E) menu costs for Hershey's were high.

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A) It will start paying less interest on deposits.
B) It will seek to reduce the amount of cash held in its vaults.
C) It will temporarily scale back its efforts to gain new customers.
D) It will start charging more interest on loans.
E) It will temporarily suspend withdrawals.

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A) would definitely fall during the year in question if,and only if,you buy less of all the goods in question.
B) would definitely rise during the year in question because two of the three goods became more expensive.
C) might rise or fall,contingent on both the quantity of the goods that you bought and the prices of these goods.
D) might rise or fall,contingent only on the quantity of the goods that you bought and regardless of the prices of these goods.
E) might rise or fall,contingent only on the percentage of the market basket that these goods constituted and the percentage that each good occupied within the basket,regardless of the quantity change from year to year.

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A) Under normal circumstances,the CPI is the better measure of the overall price level.
B) If inflation is high,the CPI is the better measure of the overall price level; if inflation is low or deflation is occurring,the GDP deflator is the better measure.
C) The GDP deflator is used only during periods of deflation; the rest of the time we use the CPI to measure the overall price level.
D) If we want to examine how price changes affect the overall economy,the GDP deflator is the better measure.
E) The CPI must be equal to the GDP deflator because of the "equation of consumer homogeneity."

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A) mustard cost about $4.44 in 1970.
B) if mustard cost $0.10 in 1970,it was relatively cheap as an inflation-adjusted price.
C) mustard cost about $0.20 in 1970.
D) mustard's price would never increase at the same rate as inflation because it is a food item.
E) ketchup would cost about $0.13 in 1970 because it typically costs about the same as mustard.

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A) nominal values of prices and wages are unknown.
B) it rapidly increases output.
C) real interest rates,prices,and wages are unknown.
D) borrowing continues at a rapid pace,creating a "false boom."
E) although price confusion problems are eliminated,the shoe-leather costs are exacerbated.

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A) prices were about the same in 2015 as in 1997.
B) hyperinflation has occurred since 1997.
C) prices were about one-third lower in 2015 than they had been in 1997.
D) prices were roughly 50% higher in 2015 than they had been in 1997.
E) Titanic was a bad movie at the time of its release but has become more popular over time.

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