Chapter 9

Question 1

what is known as a rise in the level of prices in an entire economy

Answer 1

inflation

Question 2

Inflation occurs due to

Answer 2

poor monetary policies and peoples expectations

Question 3

Inflation is a rise in ___ prices

Answer 3

ALL

Question 4

a typical set of consumer purchases refers to

Answer 4

the basket of goods and services

Question 5

How do we calculate consumer price index?

Answer 5

Current Expenditure on Basket/ Base Year Expenditure on Basket X100

Question 6

How can we calculate the Inflation Rate?

Answer 6

CPI this year-CPI last year/CPI last year X100

Question 7

the percentage change in CPI in respect to the last year

Answer 7

Inflation Rate

Question 8

shows how many times the same amount of goods is more expensive today compared to the base year

Answer 8

Consumer Price Index

Question 9

consumers replacing more expensive goods refers to

Answer 9

Substitution Bias

Question 10

the quality of goods in a basket improves fast

Answer 10

Quality/New Goods Bias

Question 11

what do we use to automatically adjust a price, wage, or interest rate to keep up with inflation

Answer 11

Indexing

Question 12

The two types of Indexing are known as a

Answer 12

COLA (Cost of living adjustment) and ARM (Adjustable Rate Mortgage)

Question 13

A Cost of Living Adjustment (COLAS) is a

Answer 13

contractual provision that wage increases will keep up with inflation

Question 14

An Adjustable Rate Mortgage (ARM) are

Answer 14

mortgage contracts in which the interest rate varies with market interest rates

Question 15

Government Indexing Programs include

Answer 15

Tax Brackets, Social Security Payments, and Indexed Bonds

Question 16

Tax Brackets determine..

Answer 16

an individuals tax rates and are indexed to account for inflation

Question 17

The Government uses Indexed bonds to..

Answer 17

pay a certain real rate of interest above whatever inflation rate occurs

Question 18

Bank of Canada’s targeted rate of inflation is

Answer 18

2%

Question 19

the Core Inflation Index excludes..

Answer 19

volatile categories from the CPI

Question 20

is a price index based on prices paid for supplies and inputs by domestic producers of goods and services

Answer 20

Producer Price Index (PPI)

Question 21

measures the level of wages paid in the labor market, we use this to measure wage inflation

Answer 21

Employment Cost Index

Question 22

measures a price level based on the prices of merchandise that are exported or imported

Answer 22

International Price Index

Question 23

is based on the prices of all GDP components (consumption, investment, government, and net exports)

Answer 23

GDP Deflator

Question 24

What problems can arise when wages, some prices, and interest rates dont follow the rate of inflation?

Answer 24

Redistributions of wealth, Blurred price signals, and Difficulties in long term planning

Question 25

Redistribution of wealth

Answer 25

those who hold an important part of their wealth in cash will see their wealth being eroded by the increase in prices, those who hold their wealth in interest-earning assets are not much affected

Question 26

Blurred price signals

Answer 26

People are confused on whether changes in prices of individual goods are due to inflation or change in relative prices

Question 27

Difficulties in long term planning

Answer 27

inflation erodes savings

Question 28

What is known as the Fishers formula

Answer 28

Real interest rate= Nominal Interest rate-Inflation

Question 29

rising inflation rates are followed by ______ productivity rates

Answer 29

lower

Question 30

lower inflation rates correspond to __________ productivity rates

Answer 30

higher

Question 31

How do we find what the price of an item in year 1 would be in year 2?

Answer 31

price of the lower year you want to calculate X (1+inflation rate/100) ^number of years
OR
price of the higher year you want to calculate/(1+inflation rate/100)^number of years

Question 32

To calculate Real GDP

Answer 32

Nominal Value/GDP Deflator X100

Question 33

To calculate Real GDP growth rate..

Answer 33

%Change in Growth Rate= Real GDP of 2nd year-Real GDP of 1st year/ Real GDP of 1st year X100

Question 34

The term negative inflation is synonymous with what

Answer 34

deflation

Question 35

T or F; inflation influences businesses, taxpayers, consumers and everyone throughout the economy.

Answer 35

True