Exam 8: The Price Level and Inflation

A) would be used to convert the consumer price index (CPI) to the gross domestic product (GDP) deflator.
B) would be used to convert today's price to an earlier price adjusting for inflation.
C) would be used to find the percentage of substitution bias.
D) would be used to find the percentage of the quality change bias.
E) would be used to convert an earlier price to today's price adjusting for inflation.

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A) there would be deflation.
B) this period was the base period.
C) this period was characterized by menu costs.
D) this period was economically optimal.
E) this period was inflationary.

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A) 20%.
B) 10%.
C) 5%.
D) 2%.
E) -4%.

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A) If you feel richer, you are experiencing money illusion.
B) You face a price confusion problem.
C) You face a menu costs problem.
D) You would be certain that your real wage had increased.
E) Bureau of Labor Statistics factors would cause you to experience deflation.

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A) 100 in 2002.
B) 108 in 2004.
C) 120 in 2006.
D) at least 118 in 2007.
E) no more than 90 in 2001.

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A) Lines are short at the coffee shop you own because your resource prices are rising and your retail prices must be raised at the same rate; your customers are confused as to whether they should buy from your shop or not.
B) Long lines at the coffee shop you own prompt you to open a new coffee shop, but the second shop is unsuccessful because the first shop's success was just due to your prices being set too low (below market prices) because of inflation.
C) It is difficult for you to determine whether the long lines at your coffee shop are due to increased demand or because inflation has created "too many dollars chasing too few goods."
D) It is difficult for you to determine the right signal to send to your consumers through prices because the signal sent to you by the Bureau of Labor Statistics is easily misinterpreted.
E) Signals sent from consumers to producers are clear, but those from producers to consumers are confused.

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A) hourly.
B) daily.
C) weekly.
D) monthly.
E) only when the typical basket of goods changes.

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A) tuition has increased more slowly than inflation.
B) tuition has increased more rapidly than inflation.
C) tuition has increased at about the same rate as inflation.
D) tuition is an inferior good.
E) tuition suffers from menu costs due to inflation.

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A) the market demand has increased, and the firm's output should increase.
B) the market demand has increased, and the firm's output should decrease.
C) the price increase is due to inflation, and the firm's output should increase.
D) the price increase is due to inflation, and the firm's output should decrease.
E) prices as a whole fall, and the firm's output should increase.

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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) housing, transportation, and entertainment.
B) transportation, housing, and energy.
C) housing, medical care, and food and beverages.
D) transportation, housing, and medical care.
E) housing, transportation, and food and beverages.

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The cost of living index will help you d...

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A) the consumer price index (CPI) would definitely fall during the year in question because housing prices do not constitute the majority of the CPI.
B) the CPI would definitely rise during the year in questions because housing prices do constitute the majority of the CPI.
C) the CPI would rise by about 1.5% because housing constitutes about half of the market basket in the CPI.
D) because housing spending is considered investment, the producer price index (PPI) but not the CPI would be the only price index affected by the change.
E) the CPI would only be affected in a small way because it includes about 8,000 goods and housing is only one of the 8,000.

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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% because that is the average housing change plus the average gasoline change.

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A) U.S. inflation and E.U. inflation were directly related, but E.U. inflation was generally more than U.S. inflation.
B) U.S. inflation and E.U. inflation were inversely related, but E.U. inflation was generally more than U.S. inflation.
C) U.S. inflation and E.U. inflation were directly related, but U.S. inflation was generally more than E.U. inflation.
D) U.S. inflation and E.U. inflation were inversely related, but U.S. inflation was generally more than E.U. inflation.
E) Both the United States and the European Union experienced deflation from about mid-1980 until about mid-1986.

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A) 92.3.
B) 106.3.
C) 108.3.
D) 152.0.
E) more than 155.0.

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A) the chained CPI more quickly takes into account new goods.
B) the chained CPI accounts for substitution between goods.
C) the chained CPI is "progressive," whereas the traditional CPI is "regressive."
D) the traditional CPI measures Engle's law but ignores the Paasche effect, which is included in the chained CPI.
E) The chained CPI more easily accounts for deflation.

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A) it increased menu costs.
B) it created future price certainty.
C) it removed relative price signals for those items that had actual increases in demand that were not due to inflation.
D) it created money illusion.
E) the Watergate break-in destroyed Americans' faith in the government.

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