Reading 26: Inflation - LOS a ～ Q1-3

答案和详解如下：

1.If the consumer price index (CPI) at year-end was 142 and the beginning of the year was 135, then the rate of inflation during the year is:

A)   5.2%.

B)   2.8%.

C)   4.7%.

D)   6.4%.

The correct answer was A)

The inflation rate can be calculated as (142 –135) / 135 = 5.2%.

2.Which of the following statements regarding inflation is most accurate?

A)   The purchasing power of money increases as a result of inflation.

B)   Inflation has no effect on the real economic output.

C)   Inflation is a persistent increase in the general price level of goods and services.

D)   As a result of inflation, all borrowers gain at the expense of lenders.

The correct answer was C)

Inflation is defined as a persistent increase in the price level over time. Inflation indicates that there has been a general decline in the purchasing power of a currency. Inflation reduces economic output by increasing transactions costs and reducing investment rates. Fixed-rate borrowers gain at the expense of lenders when inflation is greater than expected.

3.During the seminar, “Inflation – Friend or Foe?” Joe Lebow, an analyst with Greenwald & Associates, was discussing the difference between inflation and price level. He made the following two statements:

Statement 1: To measure the inflation rate of a currency, one should calculate the annual percentage change in the price level. The calculation of this change shows the connection between the inflation rate and the price level.

Statement 2: The higher the price level in the current year compared to the price level in the previous year, the higher is the inflation rate of a country. Any increase in the price level is evidence of (positive) inflation.

Are the statements as made by Lebow regarding inflation and price levels correct?

A)                   Incorrect                             Incorrect

B)                   Correct                                 Correct

C)                   Incorrect                               Correct

D)                   Correct                               Incorrect

The correct answer was D)

Statement 1 is correct. However, Statement 2 is incorrect because a one-time increase in the price level is not necessarily inflation. Inflation is an on-going process; not a one-time increase in the price level.