1. The Consumer Price Index measures inflation by using: a. all goods and servic

Question

1. 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

2. A wage-price spiral will result in lower prices in the short-run.

a. True

b. False

3. Demand-pull inflation occurs when:

A.  input costs rise.

B.  unemployment is above the natural rate.

C.  people incorrectly forecast inflation.

Explanation / Answer

1.The consumer price index measures inflation by using
d. only consumption goods and services purchased using a base-yer basket
the CPI measures only the change in the prices of a “basket” of goods consumed by a typical household.The CPI uses base year quantities rather than current year quantities in calculating the price level index value.
2.FALSE
A low level of unemployment encourages
workers to seek higher wages. In order to pay these wages must increase their prices. But as prices rise workers seek even higher wages. This causes rms to increase their prices again, and the cycle repeats itself. The net result is prices will be rising continuously i.e. there will be positive inflation : The lower the nemployment, the faster wages will rise,therefore the higher the rate of inflation.
3. Are these all the options>
Demand-pull Inflation is asserted to arise when aggregate demand in an economy outpaces aggregate supply. It involves inflation rising as real gross domestic product rises and unemployment falls, as the economy moves along the Phillips curve. This is commonly described as "too much money chasing too few goods".

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