Name: 
 

Unit 4 PRACTICE - Price Stability & Inflation



Multiple Choice
Identify the choice that best completes the statement or answers the question.
 

 1. 

If two parties to a loan contract agree that the lender should earn an 8 percent increase in purchasing power as a result of a loan, and the inflation rate is 5 percent, what is the nominal interest rate?
a.
1 percent
b.
3 percent
c.
8 percent
d.
13 percent
e.
5 percent
 

 2. 

Historically, nominal GDP has risen faster than real GDP because
a.
historically inflation is more common and more frequent than deflation.
b.
imports have risen faster than exports.
c.
populations keep increasing
d.
technological progress results in more efficient production.
 

 3. 

Among the winners if inflation is higher than expected are:
a.
nominal assets owners.
b.
those with fixed incomes.
c.
borrowers.
d.
lenders.
 

 4. 

With regard to the aggregate price level, economists generally believe:
a.
inflation is worse than deflation.
b.
price stability is a desirable goal.
c.
deflation is worse than inflation.
d.
none of the above.
 

 5. 

Unexpected inflation:
a.
affects everyone the same.
b.
helps some people but hurts others.
c.
affects only consumers.
d.
affects only business firms.
 

 6. 

If the economy grew at a 3% rate this year and average prices grew ______, people would be better off on this year compared to last year.
a.
faster than 10%
b.
faster than 3%
c.
slower than 3%
d.
3%
 

 7. 

If inflation is higher than expected, which of the following is likely to be better off as a result?
a.
debtors
b.
creditors
c.
workers on fixed pensions
d.
Social Security beneficiaries
 

 8. 

Expecting the inflation rate to be 3%, Tony decides to put his savings in a 12-month certificate of deposit yielding a fixed 6% interest rate. If the actual inflation rate is ________, it can be argued that ________ is (are) worse off.
a.
below 3%; the bank issuing the certificate
b.
below 3%; Tony
c.
above 3%; the bank issuing the certificate
d.
exactly 6%; both the bank and Tony
 

 9. 

In a market basket of goods:
a.
both the prices and the quantities change.
b.
the quantities change and the prices are held constant.
c.
the quantities stay constant and the prices change.
d.
both the prices and the quantities are held constant.
 

 10. 

Two parties to a loan contract agree to a loan with a stated (nominal) interest rate of 8% with both of them assuming the inflation rate will be 3% over the life of the loan.  The actual inflation rate during the loan's pay-back period turns out to be 5%. Who benefitted from the actual inflation rate being 5%?
a.
the borrower
b.
the lender
c.
they both benefit compared to what they expected
d.
neither
 

 11. 

The GDP deflator is another name for the consumer price index (CPI).
a.
False
b.
True
 

 12. 

The CPI this year is 148. Given this information, what do we know about the inflation rate?
a.
We don't know much about the annual inflation rate, but we know that prices are 48 percent higher than the base year.
b.
It has increased since the previous year by 48 percent.
c.
It has increased at an increasing rate.
d.
It has increased since the previous year, but we cannot tell by how much.
e.
It has increased at a decreasing rate.
 

 13. 

Inflation can best be defined as
a.
any change in the purchasing power of money
b.
an increase in the price of intermediate goods and services in the economy
c.
an increase in the price of every good and service in the economy at the same time
d.
a one-time increase in the price level
e.
a general increase in most prices as measured by the price level
 

 14. 

If the price index in year 1 is 110 and the price index in year 2 is 115, then the inflation rate is exactly 5% from year 1 to year 2.
a.
False
b.
True
 

 15. 

A price index:
a.
always includes a base year.
b.
measures the cost of purchasing a market basket of output across different years.
c.
is normalized to 100 for the base year.
d.
is all of the above.
 

 16. 

Prices keep rising every year, but the rate at which they increase has slowed down significantly.  This is described as
a.
accelerating inflation
b.
deflation
c.
disinflation
d.
inflation
 

 17. 

Suppose you received a 3 percent increase in your nominal wage. Over the year, inflation ran about 6 percent. Which of the following is true?
a.
Your real wage fell.
b.
Your nominal wage fell.
c.
Both nominal and real wages increased.
d.
Both your nominal and real wages decreased.
e.
Although your nominal wage fell, your real wage increased.
 

 18. 

Deflation:
a.
can result in an increase in employment.
b.
encourages people to hold cash rather than invest in new factories and productive assets.
c.
raises the cost of making purchases and sales for which cash is required.
d.
is all of the above.
 



 
Check Your Work     Start Over