Finc Mgmt A3 - Inflation/Deflation

Question 1

When you borrow money from a bank that will be repaid in one year and the inflation rate goes to 10% then

Answer 1

the dollars that you repay will have less purchasing power than those you borrowed from the bank.

Question 2

Consumer Price Index (CPI)

Answer 2

• benchmark inflation guide
• applies to consumer basket of goods
• rises in CPI signal inflation
• drops in CPI signal deflation

Question 3

Producer Price Index (PPI)

Answer 3

measures the average change over time in the selling prices received by domestic producers for their output and that purchasers pay for their inputs and thus is the appropriate index for measuring the decrease in a company’s purchasing power

Question 4

Inflation is measured by

Answer 4

• CPI
• GDP deflator
• Wholesale Price Index (WPI)

Question 5

Inflation distorts reported income because

Answer 5

Depreciation is not reflective of current fixed-asset replacement costs

Question 6

The Federal government measures inflation using the indicator

Answer 6

CPI

Question 7

During a _________ period, prices generally increase the fastest

Answer 7

Hyperinflation

Question 8

A rise in price levels may result when costs of raw materials or labor increase. This type of price increase is called ________ inflation.

Answer 8

Cost-push

Question 9

To convert a dollar amount from one price level to another =

Answer 9

$ x (price level converting to / price level going from)

Question 10

Percentage change =

Answer 10

(New - Old) / Old

Question 11

A likely result as the economy reaches full employment is

Answer 11

Inflation.

Demand rises and usually causes increased price levels

Question 12

Extrapolating the _____ is often used as an estimate of future prices since it is more stable than the _______

Answer 12

CPI more stable than the PPI

Question 13

CPI Formula =

Answer 13

[RETURN TO]

Question 14

Federal Budget deficit is

Answer 14

the amount by which the federal government’s expenditures exceed its revenues in a given year

Question 15

National Debt is

Answer 15

the total accumulation of the federal government’s surpluses and deficits

Question 16

Aggregate Gov Budget Deficit is

Answer 16

the excess of state, local, and federal spending over their revenues

Question 17

Negative Fund Balance is

Answer 17

the amount by which liabilities exceed assets on the federal government’s balance sheet

Question 18

The acknowledged preventive measure for a period of deflation is

Answer 18

increasing the money supply

Question 19

The Steelworkers Union argued that the standard-of-living for union members had declined through the life of the recently expired contract. The management negotiating team replied that this was not true since workers had received a 3% wage increase in each year of the 3-year contract. Could the union assertion be true?

Answer 19

Yes, because the workers’ real income might fall if price increases are proportionally greater than the wage increases received by the workers. Even though the workers received a 3% annual increase in their nominal wages, their real income (standard-of-living) could have declined if inflation had averaged more than 3% annually during the contract period.

Question 20

A reliable early predictor of inflation is

Answer 20

the Wholesale Price Index (WPI)