Reading 26: Inflation - LOS a ～ Q1-3 beginning, during, price, style, index

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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%.

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.

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?

Statement 1

Statement 2

A)                  Incorrect                              Incorrect

B)                  Correct                                Correct

C)                  Incorrect                              Correct

D)                  Correct                                Incorrect

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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?

Statement 1

Statement 2

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.