1. Inflation is a problem because it erodes nominal wage growth. a. True b. Fals
ID: 1215567 • Letter: 1
Question
1. Inflation is a problem because it erodes nominal wage growth.
a. True
b. False
2. The Consumer Price Index measures inflation by using:
a. all goods and services that are produced using a base-year basket
b. only consumption goods and services purchased using a current-year basket
c. all goods and services that are produced using a current-year basket
d. only consumption goods and services purchased using a base-yer basket
3. A wage-price spiral will result in lower prices in the short-run.
a. True
b. False
4. Demand-pull inflation occurs when:
A. input costs rise.
B. unemployment is above the natural rate.
C. people incorrectly forecast inflation.
D. aggregate demand increases.Explanation / Answer
1. Inflation is a problem because it erodes nominal wage growth. This statement is true because if there is a nominal wage growth of 4% and the inflation rate is 5%, then the workers purchasing power actually decreases by 1%. Hence the statement is true.
2. The Consumer Price Index measures inflation by using only consumption goods and services purchased using a base-year basket. Hence the correct answer is (D).
3. A wage-price spiral will result in lower prices in the short-run. This statement is absolutely false. A wage-price spiral will result in higher prices in the short run. This is because due to higher prices, people demand higher wages which increases demand and thus the prices further rise.
4. Demand pull inflation occurs when the aggregate demand rises. Hence the correct answer is (D).
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