There are five short answer questions on the test similar to these.
1. Which term best describes the price change from year 1 to year 2? From year 2 to year 3? Why?
2. Why do economists believe that when the producer price index rises, there is a good chance that the consumer price index will follow with a lag?
3. Suppose you have a contract that specifies that your salary will be increased annually with inflation, as measured by the CPI. Suppose the CPI rose from 110 to 121 last year. By how much would your income go up? Would you be happy if the rate of inflation were accelerating? Why or why not?
4. What are some of the effects of hyperinflation? What are some of its causes?
Answer Key
1. The price level is the absolute level of a price index, or measure of the average prices in an economy. Inflation occurs when prices on average (the price index) rise. Disinflation occurs when prices rise but at a declining rate. Deflation is a drop in the price level and hyperinflation is a rate of inflation so high that prices more than double every year. The price level rises from year 1 to year 2, indicating that the economy experienced inflation but not hyperinflation. Between year 2 and year 3 the price level dropped, so deflation was present.
3. Many of the items included in the PPI represent revenue when businesses sell to other businesses. Hence, it is an indicator of costs businesses face. If business costs rise, firms will try to raise prices to the final consumers and the CPI will rise.
4. The rate of inflation is (121 – 110)/110, or 10%. According to the contract, you will receive a 10% salary increase. If the rate of inflation is accelerating, then your purchasing power is decreasing. The reason is that there is a lag between when the inflation occurs and when the salary increase is implemented.
6. Hyperinflation occurs when prices rise at a very rapid rate—even daily or hourly. Although several countries experienced it, Germany in the 1920s is one of the worst cases. German workers were paid twice a day so that they could get to the stores before prices rose. Much time and energy was expended in bookkeeping to keep track of price changes. The cause of the hyperinflation in Germany was the government printing money to pay the reparations imposed on it from World War I. The result was a breakdown in the economic and political system, which opened the way for the rise of Hitler.
Multiple Choice
1. The Establishment Survey asks questions about employment in:
A) the agricultural industry.
B) manufacturing and the service industry.
C) Wall Street establishment firms.
D) households.
2. Which of the following statements about discouraged workers is NOT correct?
A) Discouraged workers have stopped actively seeking work.
B) Discouraged workers are not classified as unemployed.
C) Discouraged workers are considered underemployed.
D) Discouraged workers are considered part of the leisure class, not part of the labor force.
3. The measure of the average change in prices paid by urban consumers for a typical market basket of goods is called the:
A) GDP deflator.
B) producer price index.
C) personal consumption expenditures index.
D) consumer price index.
4. Which statement is correct?
A) The CPI's basket is based on what consumers purchase while the PCE's basket is based on what the economy produces.
B) The CPI and PCE give very different views on the rate of inflation.
C) Business spending on employee health benefits is included in the CPI but not the PCE.
D) Most economists agree that the PCE is a much better indicator than the CPI.
5. Which of the following statements regarding the CPI is NOT correct?
A) The CPI is a true cost of living measure.
B) The CPI measures the average change in prices paid by urban consumers.
C) The CPI is a conditional cost-of-goods index.
D) The CPI must be adjusted for quality changes in products.
6. Measuring changes in a fixed basket of goods is a method of measuring changes in price.
A) cost-of-goods index
B) cost-of-living index
C) cost-of-production
D) utility maximization
7. The period of U.S. history that represented the highest rate of inflation was:
A) the Great Depression.
B) World War II.
C) the 1970s.
D) the 1980s.
8. Which of the following statements regarding the types of unemployment is true?
A) Frictional unemployment is generally short-term, whereas structural unemployment is often long-term.
B) Cyclical unemployment is due to expansions in the business cycle.
C) Frictional unemployment is brought about by changes in technology.
D) Structural unemployment is the result of normal labor turnover.
9. U.S. unemployment rates for 1980–2000 show:
A) workers under age 24 with lower unemployment rates than older workers.
B) higher unemployment rates for whites than for blacks and Hispanics.
C) unemployment rates for college graduates to average 4%.
D) a drop in the total unemployment rate.
10. The GDP deflator for the base year is:
A) less than 100.
B) always equal to 100.
C) greater than 100.
D) dependent on the quantities of output and the prices at which outputs are sold in the base year.
Answer Key Ch. 16 Multiple Choice Test
1. B
2. C
3. D
4. A
5. A
6. A
7. B
8. A
9. D
10. B
I am incorporating true/ false questions into this test. These questions are from the quiz given last Wednesday. The test will have similar questions.
AP Economics Ch. 16 T/F Quiz
1. Inflation is a measure of the changes in the cost of production.
A) True
B) False
2. The Bureau of Labor Standards collects a random sample of different goods and services every month in order to achieve statistical uniformity.
A) True
B) False
3. Use of the GDP deflator allows economists to estimate the real rate of growth of the economy.
A) True
B) False
4. If the nominal GDP rose by 5% and the GDP deflator also rose by 5%, then the real GDP is unchanged.
A) True
B) False
5. Unemployment rates differ little by education, age, or ethnic group.
A) True
B) False
6. Young females have a higher unemployment rate than young males.
A) True
B) False
7. A person is considered to be unemployed if he or she has been either actively or passively looking for work.
A) True
B) False
8. Underemployed workers are workers who have the desire and ability to contribute significantly more to GDP but are in jobs where they cannot do so.
A) True
B) False
9. The presence of discouraged workers tends to cause the official unemployment rate to understate the actual rate.
A) True
B) False
10. The goal of unemployment policy is to eliminate frictional unemployment.
A) True
B) False
CH. 16 T/F Quiz Answer Key
1. B
2. B
3. A
4. A
5. B
6. B
7. B
8. A
9. A
10. B