Question 1. Which of the following is an example of inflation according to the textbook definition?
a. The price of steel increased in the month of March but did not increase in January or February. It is not expected to increase in April.
b. The price of steel increased in 2008
c. The general price level (or the average price level for all goods) has been increasing from the base year to the current year.
d. The price of steel increased in 2008 and 2009 (up to March)
Question 2. Inflation can be caused by cost-push or demand-pull factors. Where does each type of inflation originate and what are some examples? You answer is
a. Cost-push factors originate in the public sector. Example: increase cost of production. Demand-pull factors originate in the private sector. Example: decrease in aggregate supply.
b. Cost push factors originate in the private sector. Example: increase cost of production. Demand-pull factors originate in the private sector. Example: increases in money supply
c. Cost push factors originate in the private sector. Example:An increase cost of production. Demand-pull factors originate in the private sector. Example: increases in budget deficits by the government
d. Cost-push and demand-pull factors originate in the public sector. Examples are increase cost of production and increased in the aggregate supply.
Question 3. How does an occurrence of inflation lead to redistribution of resources within an economy?
a. Inflation lowers the value of monetary assets and increases the value of real assets.
b. Inflation makes significant income shifts from unorganized labor to organized labor, which can negotiate the wage rates better.
c. Inflation can potentially add cost of production and lead to high rates of unemployment by lowering the aggregate supply
d. All of the above
Question 4. Why does inflation (in the short-run) lead to an increase in investment? This is mainly because due to inflation------
a. Wage level increases immediately, leading to higher cost of production
b. There is an increase in aggregate demand because of future expected inflation which makes interest rate go up
c. The GDP will go up leading to lower interest rate and even lower MEC.
d. There is a lag in the increase of wages but demand increases immediately, leading to higher expected profit rate (MEC)
Question 5. Which one of the following is an example of cost push factor that will increase inflation? Which one is the demand pull factor? Your answers (respectively) are:
a. increase in labor cost, increase in money supply
b. increase in government expenditure, increase in cost of production
c. increase in money supply, improvement in technology
d. decrease in taxes, increase in labor cost
Question 6. If government’s expenditure (G) is greater than its tax revenues (Tx) it is said to be running a __________, which can be remedied by_________
a. Surplus, buying up government bonds issued in the past.
b. Deficit, selling bonds to the public
c. Deficit, buying bonds from the public and by making the central bank print less money.
d. Deficit, selling bonds to the central bank thereby decreasing public debt.
Question 7. Which of the following is not a cause of demand-pull inflation?
a. Budget deficits
b. Increase in the population leading to higher aggregate demand
c. Permanent increase in the tax rate, to solve the budget deficit problem
d. Increase in aggregate demand due to higher money supply
Question 8. The biggest problem with any inflation is that it-----
a. reduces the value of real assets
b. redistributes assets from organized labor to unorganized labor
c. raises future expected inflation and feeds on itself
d. reduces in unemployment
Question 9. Which type of inflation is associated higher unemployment and why?
a. Demand-pull, because it leads to higher demand for goods putting producers out of business and therefore decreasing the amount of labor needed
b. Cost-push because it leads to a decrease in aggregate supply, lowering the level of production and therefore decreasing the amount of labor needed
c. Cost-push because aggregate demand stays constant while aggregate supply increases causing excess supply and lower employment levels.
d. Demand-pull because higher budget deficits lead to higher debt burden which increases demand for goods therefore causing a decrease in employment rate.
Question 10. The original Phillips curve postulated an inverse relationship between the increase in the money wage rate and the unemployment rate. This relationship holds if-------
a. The increase in money wage rate leads to higher demand for labor and indicates a shortage in the labor market
b. The cost of capital (i.e. the interest rate) does not increase between the time money wage rate increases and the time of additional investment.
c. The multiplier effect is strong enough to lead to higher GDP with higher aggregate demand that is created by higher wages.
d. All of the above seem to be rational explanations.