2 Quiz Question 1 The rate of inflation is the: A. median level of prices. B. average level of prices.C. percentage change in the level of prices.D. measure of the overall level of prices.
3 Essay 5 Question c Describe the two main measures of inflation Percentage change in Consumer Price Indexvalue of a fixed basket of goods at a certain datemeasures the “cost of livingMeasures price changes weighted by importance of goods in budgetDoesn’t measure changes different compositions of basketsPercentage change in the GDP Deflator.Nominal GDP/Real GDP *100Nominal GDP - current prices, Real GDP - base year pricesDoes not include imported goods
4 Essay 5 Question dInflation interferes with the market allocation mechanism. Explain.Prices change due to other reasons but preferencesMakes it hard to distinguish overall from relative price changesPrices are stickyCreates relative price changes if not all firms are able to adjust prices at the same speed
5 Quiz Question 2 In the case of an unanticipated inflation: A. creditors with an unindexed contract are hurt because they get less than they expected in real terms. B. creditors with an indexed contract gain because they get more than they contracted for in nominal terms. C. debtors with an unindexed contract do not gain because they pay exactly what they contracted for in nominal terms. D. debtors with an indexed contract are hurt because they pay more than they contracted for in nominal terms.
6 Quiz Question 3If inflation is 6 percent and a worker receives a 4 percent wage increase, then the worker's real wage:A. increased 4 percent. B. increased 2 percent. C. decreased 2 percent. D. decreased 6 percent.
7 Essay 4 Question aFaced with a negative demand shock, the central bank needs to strike a balance between doing “too much” and doing “too little”. Explain.Central bank faces trade-off between increasing output and decreasing inflationCan work as demand shock itselfIf too much – output surpasses natural rate - generates inflationIf too little – output stays low = recession
8 Essay 5 Question cWhen will a monetary expansion not result in inflation?
9 Essay 5 Question f Explain why disinflation is costly. What is disinflation? What is deflation?Depends on expectationsIf unexpected disinflationWhenever inflation is lower than expectationsPrices increase more than money supplyReal Money Balances fallEquivalent of a demand shockWhat happens if disinflation is expected?
10 Essay 5 Question gIn ending a hyperinflation, it is useful to have a “nominal anchor”. Explain.
11 Quiz Question 4In practice, in order to stop a hyperinflation, in addition to stopping monetary growth, the government must:A. lower taxes and raise government spending.B. raise taxes and reduce government spending. C. change from one kind of currency to another. D. call for a new election.
12 Question 4 If a central bank drops money from a helicopter It won’t affect interest rates as there is no corresponding purchase of bondsIt will have the same effects as an OMO for the same amountWill affect demand positively through lower interest rates and negatively through inflationCombines elements of monetary and fiscal stimulus