Quiz 2 (P.18-32)

Question 1

Define the Consumer Price Index (CPI) and how it is represented.

Answer 1

The CPI is an indicator of the change in the general level of prices of consumer goods and services. It is represented by a number.

Question 2

How is the CPI/ Price Index/ Price level calculated?

Answer 2

It is calculated by calculating the total cost of a fixed basket of goods in the base year and then, by using the same quantity, calculating the total price for every other year. Then, divide a given year/ base year X 100.

Question 3

How is rate of growth represented?

Answer 3

%Δ

Question 4

How is rate of growth calculated?

Answer 4

Present/Past X 100

Question 5

What does IPPI stand for?

Answer 5

Industrial Product Price Index

Question 6

What does the IPPI measure?

Answer 6

IPPI measures the change in the general level of prices of goods and services that firms buy.

Question 7

What is the “Deflator” also known as?

Answer 7

The deflator is also known as the GDP Implicit Price Deflator Index.

Question 8

What does the Deflator represent?

Answer 8

The Deflator represents the average of all prices of everything in GDP and GNP.

Question 9

When we say the inflation rate, we mean the…

Answer 9

Rate of growth (%Δ) of the Price Index/Price Level/ CPI

Question 10

Inflation is when the rate of growth is:

Answer 10

Positive

Question 11

Deflation is when the rate of growth is:

Answer 11

Negative

Question 12

The degrees of severity of inflation are (5):

Answer 12

Deflation (-0%), Creeping inflation (0-9.99.%/year), Double-Digit inflation (10+/year), Galloping inflation (20-60%/year), and Hyper-Inflation (600%/year)

Question 13

How often is double-digit inflation visible?

Answer 13

Every month

Question 14

How often is galloping inflation visible?

Answer 14

Every week or day

Question 15

How often is hyper-inflation visible?

Answer 15

Every hour of every day

Question 16

What is the inflation rate of a healthy economy?

Answer 16

A healthy economy should have between 1-3% inflation/per year.

Question 17

Why is unanticipated inflation a bad thing?

Answer 17

Unanticipated inflation means that there is now uncertainty therefore people will change their behaviours to protect the purchasing power of their money.

Question 18

What are the causes of inflation (3)?

Answer 18

Excess demand/spending, supply shocks and excessive increases in the supply of money caused by govern’t debt

Question 19

What happens when prices rise at unpredictable rates?

Answer 19

Spending accelerates, which then makes firms produce more goods and services (economic expansion)

Question 20

When the employment rate begins to approach natural rate of unemployment, what happens that causes inflation?

Answer 20

When the unemployment rate begins to approach natural rate of unemployment, it means more workers are hired and eventually, there will be a shortage of skilled workers and materials so costs will rise and then inflation occurs. Then, spending accelerates.

Question 21

Will firms expand when inflation is occurring?

Answer 21

No, firms will not expand because it would be too risky at this time. They use their existing facilities because they are uncertain how long excess demand will last.

Question 22

What can be done to help problem of excess spending?

Answer 22

Policy solutions may be put in place.

Question 23

What is the source of job growth in the economy?

Answer 23

Business investments

Question 24

What are the effects of excess-demand inflation on the whole economy?

Answer 24

Savings in the banks fall, interest rates rise and then investments fall.

Question 25

What are the effects of excess demands on owners of real assets?

Answer 25

The value of the real asset will increase. Ex/ Bought home for $100,000 at 20% inflation= $120,000 home. Therefore, a winner

Question 26

What are the effects of excess demands on debtors?

Answer 26

Borrowing money at one time when prices are still lower and then repaying, when the costs of what bought are now higher; saving money. Therefore, winner

Question 27

What are the effects of excess demands on owners of financial assets?

Answer 27

Savings will buy fewer goods than before. Therefore, loser

Question 28

What are the effects of excess demands on creditors?

Answer 28

Money received back will have less purchasing power than before. Therefore, loser

Question 29

What are supply shocks (2)?

Answer 29

Supply shocks are when the cost of one key item has risen so much that people have to reduce spending on other things to be able to afford it, OR natural disaster reduces firms’ abilities to produce and therefore people to buy, leading to a recession.