Reading 25: U.S. Inflation, Unemployment, and Business Cycles following, increase, describe, 2010, Business

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LOS b: Describe and distinguish among the factors resulting in demand-pull and cost-push inflation and describe the evolution of demand-pull and cost-push inflationary processes.

Which of the following factors would least likely result in demand-pull inflation? An increase in:

A) exports.

B) the wage rate.

C) the quantity of money.

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Demand-pull inflation can result from any factor that increases aggregate demand, including increases in the money supply, increases in exports, and increases in government purchases. Increases in the money wage rate or the prices of other productive inputs would result in cost-push inflation as aggregate supply decreases.

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Which one of the following is most likely to experience loss of wealth from an unanticipated increase in the inflation rate?

A) A commercial bank that has a large quantity of fixed-rate mortgages in its loan portfolio.

B) An individual investor who recently purchased a substantial amount of variable rate bonds.

C) An individual investor who financed the purchase of a home with a 30-year fixed rate mortgage.

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If an economy experiences unanticipated inflation then the losers will be those people who are holding long-term contracts in which they are to receive fixed payments. A bank that has a large quantity of fixed-rate mortgages in its loan portfolio (i.e., they are investments for the bank) is receiving fixed-rate payments. Both remaining choices are all investors who are either making fixed rate payments (the homeowner) or receiving floating-rate payments (the investor in variable rate bonds).

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Which of the following statements is most accurate? Cost-push inflation:

A) typically results from a significant price increase in a production input.

B) often occurs because of an increase in short-run aggregate supply.

C) results from excess short-run aggregate demand.

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Cost-push inflation typically results from a significant price increase in a production input that causes a decrease in short-run aggregate supply.