During deflation the overall price level falls, so each dollar can buy more goods and services than before.
Correct Answer
True
True. Deflation is negative inflation, a sustained fall in the overall price level. Because prices are lower, a given amount of money buys more, so its purchasing power rises.
Category: Inflation Basics
Question 2
Choosing a different base year for a price index changes the inflation rates calculated from that index.
Correct Answer
False
False. The choice of base year is arbitrary; switching it rescales every index number by the same factor, so the percentage changes between years stay the same. Statistical agencies update the base year from time to time so that it stays close to the present.
Category: Price Indexes and Bias
Question 3
An index number has no units because it expresses a cost relative to the cost in the base year.
Correct Answer
True
True. An index number is a ratio of one period's cost to the base period's cost, multiplied by 100, so the dollar units cancel out. That makes it easy to compare price levels across years at a glance.
Category: Price Indexes and Bias
Question 4
A price index of 120 means that prices are 120% higher than in the base year.
Correct Answer
False
False. Because the base year is set to 100, an index of 120 means prices are 20% higher than in the base year. Prices 120% higher would correspond to an index of 220.
Category: Price Indexes and Bias
Question 5
The Bureau of Labor Statistics uses a survey of household spending to choose the items in the CPI basket and the weight each one receives.
Correct Answer
True
True. The BLS relies on the Consumer Expenditure Survey of thousands of households to learn what people buy and in what amounts. Those spending patterns determine which items enter the basket and how heavily each counts.
Category: Price Indexes and Bias
Question 6
Because it ignores improvements in product quality, a fixed-basket price index tends to understate increases in the cost of living.
Correct Answer
False
False. Ignoring quality improvements and new products makes a fixed-basket index overstate increases in the cost of living. If a product gets better at the same price, consumers are actually better off, but the index records no gain.
Category: Price Indexes and Bias
Question 7
The United States experienced surges of inflation after both World War I and World War II.
Correct Answer
True
True. Heavy wartime spending, followed in the 1940s by the end of wartime price controls, produced bursts of inflation after both World Wars. These are two of the major inflation waves of the twentieth century in the United States.
Category: Inflation History
Question 8
The GDP deflator is a better measure of changes in the household cost of living than the CPI because it includes investment goods.
Correct Answer
False
False. The CPI is the cost-of-living measure because it covers only what households buy. The GDP deflator covers all of a nation's output, including machinery and other capital goods that households do not purchase, so it measures overall output prices rather than the cost of living.
Category: Price Indexes and Bias
Question 9
The International Price Index tracks the prices of merchandise that a country imports and exports.
Correct Answer
True
True. The International Price Index measures inflation in the prices of goods traded across borders. It complements the CPI, which covers household purchases, and the PPI, which covers prices paid by producers.
Category: Price Indexes and Bias
Question 10
People who hold large amounts of cash gain purchasing power during a period of inflation.
Correct Answer
False
False. Cash pays no interest, so when prices rise, each dollar held buys less. Holders of cash are among the clearest losers from inflation.
Category: Winners and Losers
Question 11
Because U.S. income tax applies to nominal interest earnings, a saver can owe tax on interest even when the real return is negative.
Correct Answer
True
True. Tax is figured on the nominal interest received, not on the inflation-adjusted gain. If inflation exceeds the nominal rate, the saver loses purchasing power yet still owes tax on the nominal interest.
Category: Winners and Losers
Question 12
Inflation makes price changes clearer signals of shifts in supply and demand.
Correct Answer
False
False. Inflation blurs price signals, because buyers and sellers cannot easily tell whether a higher price reflects general inflation or a real change in supply or demand. High and variable inflation therefore makes markets adjust more slowly and erratically.
Category: Costs of Inflation
Question 13
High and unpredictable inflation makes long-term planning harder for savers and businesses because the future purchasing power of money is uncertain.
Correct Answer
True
True. Saving for retirement or signing long-term contracts requires knowing what future dollars will buy. When inflation is high and variable, that is hard to predict, which pushes firms toward short-term strategies.
Category: Costs of Inflation
Question 14
Social Security benefits in the United States are set in nominal dollars and are not adjusted for inflation.
Correct Answer
False
False. Social Security benefits are indexed to the Consumer Price Index, so they rise automatically with inflation. This protects retirees' purchasing power over time.
Category: Indexing
Question 15
Indexing in an economy is usually partial, so some people and businesses remain exposed to the costs of inflation.
Correct Answer
True
True. Not every employer offers cost-of-living adjustments, and not every contract, price or payment is tied to inflation. Those left out still bear inflation's uneven effects.
Category: Indexing
Question 16
The 1970s were a period of unusually low and stable inflation in the United States.
Correct Answer
False
False. The 1970s and early 1980s brought the most severe U.S. inflation of the late twentieth century, with double-digit annual rates at times. Inflation then fell sharply in the early 1980s.
Category: Inflation History
Question 17
Zimbabwe experienced hyperinflation in the 2000s.
Correct Answer
True
True. Zimbabwe's prices rose so fast in the 2000s that its government printed bills with face values in the trillions of Zimbabwean dollars, which were nearly worthless. It is a standard modern example of hyperinflation.
Category: Inflation History
Question 18
One argument for a low positive inflation rate is that it lets real wages fall without cuts in nominal pay, which employers and workers tend to resist.
Correct Answer
True
True. Wages tend to be sticky downward, so a needed drop in real wages can show up as unemployment instead. Some economists argue that mild inflation allows real wages to adjust, although the argument is debated.
Category: Costs of Inflation
Question 19
An indexed government bond pays a fixed nominal return, so its holders lose purchasing power when inflation rises.
Correct Answer
False
False. An indexed bond adjusts its payments for inflation and promises a set real return above whatever inflation occurs. That protection is what makes it attractive to savers worried about rising prices.
Category: Indexing
Question 20
Any increase in the price of a single good, such as gasoline, counts as inflation.
Correct Answer
False
False. Inflation is a general rise in the overall price level, measured across a whole basket of goods and services. A price rise for one good can be offset by falling prices elsewhere and may reflect only a change in that good's supply or demand.
Category: Inflation Basics