Reading 25: U.S. Inflation, Unemployment, and Business Cycles 2011, statements, following, regarding

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Session 6: Economics: Monetary and Fiscal Economics
Reading 25: U.S. Inflation, Unemployment, and Business Cycles

LOS a: Differentiate between inflation and the price level.

 

 

Which of the following statements regarding inflation is most accurate?

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

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

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

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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. Fixed-rate borrowers gain at the expense of lenders when inflation is greater than expected.

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Which of the following statements regarding inflation is most accurate?

A) An economy experiences inflation when there is a persistent increase in the prices of almost all goods and services.

B) Inflation occurs when there is a steady increase in the relative prices of key commodities.

C) Inflation is present if the prices of some goods and services are increasing.

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Inflation is a persistent increase in the price level over time. Inflation occurs when there is a sustained increase in the prices of almost all goods and services. Inflation indicates a decline in the purchasing power of a currency.

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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) Correct Incorrect

B) Incorrect Incorrect

C) Correct Correct

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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.

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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) 4.7%.

B) 5.2%.

C) 2.8%.

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