Chapter 3 - Inflation

Chapter 3 Inflation

Multiple Choice

Inflation is...

• The rate at which prices decrease; a general and continuing decrease in prices

• The rate at which prices rise; a general and continuing rise in prices

• The rate at which prices stay the same; a general consistent rate of prices

Multiple Choice

How is inflation measured?

• By comparing average prices of all goods and services produced

• Consumer Price Index (CPI)

• Producer Price index (PPI)

• Government Price Index (GPI)

Multiple Choice

Which of the following measure of inflation includes housing costs?

• CPI

• RPI

• CPI

Multiple Choice

A decrease in general price level is called...

• Hyperinflation

• Low inflation

• Deflation

• Disinflation

Multiple Choice

Inflation caused by an increase in demand faster than supply can increase is called...

• Demand pull

• Demand push

• Cost push

• Cost pull

Multiple Choice

Demand-Pull inflation can be describes as too many _________ chasing too few __________

• jobs, workers

• consumers, producers

• dollars, goods

Open Ended

Briefly explain demand-pull inflation using and AS/AD diagram

Multiple Choice

Inflation caused by a rise in wage rates would be classified as..

• Demand pull

• Demand push

• Cost push

• Cost pull

Impacts of Inflation

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Open Ended

Briefly explain cost-push inflation using this AS/AD diagram

Multiple Choice

During a recession, inflation is likely to be..

• High

• Low

• May mean lower unemployment (with demand-pull inflation)

• Inflation may be needed for economic growth

• Cost of borrowing may fall

​Positive

• Loss of purchasing power

• Wages

• Expensive exports

• Menu Costs

• Shoe leather costs

• Business and Consumer Uncertainty

• Lower Business and Consumer Confidence

• Fewer investments made

​Negative

Impacts of inflation

Multiple Choice

When inflation is high the _______________of the dollar decreases

• cost value

• purchasing power

• importance

• validity

Multiple Choice

If CPI goes from 100 to 300 and your salary goes from $100,000 to $200,000, what happened to your purchasing power?

• Increase

• Decrease

• No change

Multiple Choice

If CPI goes from 100 to 300, your wages (lohn) goes from $100,000 to _______ to maintain your purchasing power ?

• $300,000

• $150,000

• $250,000

Multiple Choice

The costs of changing prices (brochures, websites, informing sales people, etc.) is called:

• Shoe Leather Costs

• Sunk Costs

• Menu Costs

Multiple Choice

A barber spends two hours each week searching for the cheapest shampoo before making his purchases.

• Shoe Leather Costs

• Menu Costs

• Sunk Costs

Multiple Choice

Most economists believe that some inflation will occur when the economy is growing.

• True

• False

Multiple Choice

A consequence of high inflation is that it benefits borrowers.

• True

• False

PLEASE READ:

CHAIN OF REASONING: Discuss whether or not a higher inflation rate will benefit producers.

Producers may be able to borrow more cheaply

• the burden of past debts will fall

• if the rate of inflation is above the rate of interest

• Higher inflation will reduce the cost of borrowing

Producers may receive higher prices/revenue for their products

• if their costs rise by less than the increase in prices

• this means profits will rise

Producers may experience more exports

• If there is higher inflation rate in other countries (even if your country has inflation)

• will make this country’s products more competitive

• If demand is inelastic a rise in price will increase revenue