Exam 8: The Price Level and Inflation

A) new houses were new goods and services and the consumer price index (CPI) didn't measure them.
B) builders confused inflation with an increase in demand and hence overbuilt-a price confusion problem.
C) there were menu costs associated with higher housing prices.
D) money illusion occurred when builders thought that real prices were rising.
E) money illusion occurred when housing buyers thought real wages were rising.

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A) the consumer price index (CPI) will include Joe's new product immediately if it is a consumer good, but as a consumer good, it will not be included in the gross domestic product (GDP) deflator.
B) the percent change in the CPI will be distorted, but the change in the GDP deflator will not be, regardless of whether the product is a consumer good or a producer good.
C) it is unlikely the CPI will include Joe's new product immediately, even if it is a consumer good.
D) money illusion will cause consumers to buy more of this good than the CPI would otherwise reflect.
E) this good might be produced in a geographic location that is not included in the CPI.

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A) nations that increase their money supply most rapidly will be the most prosperous.
B) hyperinflation will normally be associated with large increases in the money supply.
C) hyperinflation will normally be associated with large decreases in the money supply.
D) menu costs will rise when the money supply falls.
E) real wages rise whenever the money supply increases.

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A) the consumer price index (CPI) will rise in 2008 if, and only if, State College is one of the 38 geographic locations and oranges are one of the 8,000 goods included in the CPI.
B) the CPI will almost certainly rise in 2008, even if State College is not included, as long as chicken is included and becomes more expensive on average at the indexed locations.
C) the CPI will likely fall if the average weighted price of chicken increases in the United States and the price of chicken at Wegmans makes almost no difference in the CPI.
D) the CPI might rise or fall and the price of chicken at Wegmans could make a very small difference in the CPI if chicken at Wegmans is included in the index.However, chicken would be a relatively small portion of the entire CPI if it is included at all.
E) chicken prices are never included in the CPI because the creator of the CPI, James Gapinski, did not like chickens.

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A) Inflation was 20% this year.
B) Deflation was 20% this year.
C) Housing prices must have fallen.
D) Inflation was 13.33% this year.
E) Deflation was 13.33% this year.

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A) January 2003: 100; July 2003: 118; July 2004: 120
B) January 2003: 200; July 2003: 236; July 2004: 250
C) January 2003: 100; July 2003: 118; July 2004: 200
D) January 2003: 110; July 2003: 120; July 2004: 130
E) January 2003: 100; July 2003: 118; July 2004: 106

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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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Substitution: Consumers do not buy the s...

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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) nominal tuition has decreased.
E) tuition suffers from money illusion due to inflation.

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A) less than 1%.
B) about 4%.
C) about 8%.
D) about 12%.
E) negative.

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When inflation occurs,producers have to ...

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

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A) 3% of the CPI
B) 5% of the CPI.
C) 10% of the CPI.
D) 15% of the CPI.
E) 20% of the CPI.

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A) Inflation was 20% this year.
B) Deflation was 20% this year.
C) Housing prices must have risen.
D) Inflation was 38% this year.
E) Deflation was 38% this year.

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A) when wages rise faster than inflation, companies lose money.
B) when wages rise slower than inflation, workers suffer but corporate profits increase.
C) inflation creates uncertainty about costs and prices, which affects both employees and employers.
D) all inflation will eventually lead to hyperinflation, political instability, and war.
E) menu costs mean restaurants have to print new menus, which is costly and unpleasant.

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A) was very low.
B) did not exist; during 2008 Zimbabwe had deflation.
C) was about the same as its neighbors, somewhere around 20%.
D) was very high at the beginning of the year but fell when Robert Mugabe agreed to share power with Morgan Tsvangarai.
E) reached the rate of 80 billion percent per month.

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A) you would be indifferent between the two jobs because the real wages would be about the same (within 2%) .
B) you would definitely take the job in Chicago because the real wage is higher there.
C) you would definitely take the job in Philadelphia because the real wage is higher there.
D) you would suffer from money illusion and be conflicted.
E) because there is a direct correlation between the real wage and the nominal wage, the job in Philadelphia is definitely the one to take.

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