Module 7

Since 1982-84 in general prices of services sold to consumers have

Increased relative to the prices of goods sold to consumers.

Decreased relative to prices of goods sold to consumers

Increased relative to prices of nondurable goods sold to consumers, but decreased relative to prices of durable goods

Increased at about the same rate as prices of goods sold to consumers

Which of these statements is false?

If the federal funds rate is decreased enough to cause inflation it will also cause a recession.

If the federal funds rate is too low, it will cause inflation

If inflation occurs, and begins to increase, the only way to reduce it is to increase the federal funds rate

Increases in the federal funds rate sufficient to reduce inflation might cause a recession

Over relatively long periods of time inflation as measured by the PPI is

Usually lower than that as measured by the CPI.

Usually about the same as that as measured by the CPI

Usually greater than that as measured by the CPI-U, but not the CPI-W

Usually greater than that as measured by the CPI

On Monday, August 13, 2012 the yield to maturity on a 5-year loan to the US government was 0.71% per year. Around that same time results from a survey of professional forecasters suggested that the expected rate of inflation over the next five years was 2.5% per year. What is the corresponding real rate of interest?

-1.746% per year

-1.79% per year

0.0% per year

1.025% per year

In the lectures we derived the aggregate demand curve by considering the effect of a change in the price level on:

A firm's willingness to produce additional output

Personal consumption expenditures

Government spending

The location of the expenditure curve

Suppose the vertical AD curve lies to the right of the long-run AS curve. When this is the case, then

Prices increase but output remains near the full employment (or natural) level of GDP.

Prices decrease but output remains near the full employment (or natural) level of GDP

Prices decrease and the economy most likely will be in a recession

The rate of inflation will decrease

Suppose Samuel borrows $5000 at a rate of 8% per year to invest in making wine. He purchase $2500 worth of grapes and spend $1,000 on bottles, corks and storage while the wine is fermenting and spends $1500 on labor. At the end of one year he will have 400 bottles of sparkling wine that currently sell for $15 each. If he expects the price of wine to be 10% higher than it is todaya year from now , what accounting profit will he make?

$1,200

$660

$1,000

$5,400

Aggregate supply is

The relationship between the price level and the amount of output economic actors wish to produce.

The relationship between the price level and the amount of output economic actors wish to purchase

An upward sloping curve in the long-run

A downward-sloping curve in the short-run

Suppose John expects the rate of inflation to be zero and he is willing to lend $3,000 for one year at a rate of interest of 12% per year (compounded annually). If he suddenly learns that most forecasters are predicting that the rate of inflation is going to be 4% per year (compounded annually), then what rate of interest would he have to earn for it to be equivalent to earning 12% with no inflation?

16% per year (compounded annually)

16.48% per year (compounded annually)

8.48% per year (compounded annually)

15.52% per year (compounded annually)

The rate of inflation as measured by the PPI for finished goods (less food and energy) tends to increase when the purchasing manager’s index for prices

Is below 50% and declining

Is above 50%

Is above 50% and increasing

Is increasing

The Fed usually

Increases the federal funds rate if total capacity utilization increases to a value above 83.

Increases the federal funds rate if total capacity utilization declines

Decreases the federal funds rate if total capacity utilization increases to a value above 83.

Decreases the federal funds rate if total capacity utilization increases to a value below 65.

Suppose Joe buys 12 oranges for $1 and 10 apples for $1. Suppose the price of oranges increases to $1.50 and the price of apples decreases to $0.50. Which of the following statements is true if Joe continues to buy 12 oranges and 10 apples?

From Joe’s point of view, given his fixed basket of goods, the price level has increased.

Joe's total expenditure has increased from $22 to $24

From Joe's point of view, given his fixed basket of goods, the price level has declined

Joe's total expenditure has decreased from $22 to $21

Which of the following equations is the Fisher equation solved for the expected rate of inflation? (i = nominal rate of interest, and r = real rate of interest.)

πe = (i – r)/(1+r)

πe = (i – r)/(1-r)

πe = (i +r)/(1+r)

πe = (i – r)/(1*r)

From the mid-1990’s to 2012 the prices of durable goods (as a whole)

Have declined

Have increased at a slower rate than the prices of non-durable goods

Have increased at a faster rate than non-durable goods

Have increased slowly, but not declined

The way in which on-going inflation differs from a once-for-all change in the price level is

Once-for-all inflation is a one-time change in the price level that does not continue.

On-going inflation is not expected to continue

With on-going inflation relative prices always change

With a once-for-all change in the price level relative prices never change

There was a sharp increase in the rate of inflation in the United States from 1977 to 1980. In one of the lectures your instructor attributes this to

The federal funds rate being below the rate of inflation in 1975 and 1976

High government spending

The federal funds rate being about equal to the rate of inflation in 1975 and 1976

The federal funds rate being too high in 1975 and 1976

When we derived the AD curve in the lectures, we found the AD curve was vertical because

as the price level decreases the rate of interest does not change because the Fed controls the general level of interest rates.

As the price level decreases the rate of interest also decreases

As the price level decreases the rate of interest increases

As the price level decreases the Fed causes the general level of interest rates to decline

Periods of rising inflation during the 1960’s and 1970’s were characterized by

values of total capacity utilization above 85%.

values of total capacity utilization above 70% but below 75%

values of total capacity utilization below 80%

Rising values of total capacity utilization

Aggregate demand is

Correct the relationship between the price level and the amount of output economic actors wish to purchase.

Correct the relationship between the price level and the amount of output economic actors wish to produce

An upward sloping curve in the long-run

Is downward sloping as long as the Fed pegs the rate of interest

Which of the following statements about the personal consumption expenditures implicit price deflator excluding food and energy is true?

The PCE excluding food and energy grows at about the same rate as the overall PCE, but over short periods of time is less volatile.

The PCE excluding food and energy increases faster than the overall PCE over long periods of time

The PCE excluding food and energy fluctuates more over short periods of time than the overall PCE

The PCE excluding food and energy is less volatile than the overall PCE but over long periods of time grows more slowly

To say inflation is a monetary phenomenon

Means that inflation can be caused by or prevented by monetary policy.

Does not mean that inflation can be prevented by good monetary policy

Means that inflation is caused by interest rates being too high

Means that higher taxes cannot cause the price level to increase once-for-all

If the price level goes down, then (in the Keynesian Cross model)

The location of the expenditure curve shifts upwards if the rate of interest goes down as a result of the price level decrease.

The location of the expenditure curve always shifts upwards

The location of the expenditure curve shifts downwards unless the rate of interest goes down

The location of the expenditure curve shifts downwards if the Fed pegs the rate of interest

Periods of declining inflation are usually

Preceded by declines in total capacity utilization.

Followed by declines in total capacity utilization

Preceded by decreases in the federal funds rate

The result of an economic boom

Suppose you observe that in country A output is relatively high and prices are not increasing, while in country B output also is relatively high but prices are increasing. This implies

The interest rate in country A is about right while that in country B is too low.

The interest rates in both countries are about right

The interest rate in country A is too low and that in country B is too high

The interest rate in both countries is too low

Suppose the nominal rate of interest on a 5-year loan is 8% per year compounding annually and the real rate of interest is 4.5% per year. What is the expected rate of inflation?

3.35%

3.5%

3.85%

4.5%

From 2002 to the middle of 2012 the prices of nondurable consumer goods have

Increased at about the same rate as prices of services sold to consumers.

Decreases relative to the prices of durable consumer goods

Increased relative to the prices of services sold to consumers

Have declined but at a slower rate than prices of consumer durable goods

During July 2012 the CPI-U (not seasonally adjusted and rounded to the nearest whole number) equaled 229, while its value in July 2011 was 226. This means

That prices in July 2012 were about 1.4% higher than those in July 2011.

That prices in July 2012 were about 3% higher than those in July 2011.

That prices in July 2012 were 2.29 times as high as those in 1990, the base year for the CPI

That prices in July 2012 were 2.29 times as high as those in 1985, the base year for the CPI

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