Question

Which measure of inflation means most to U.S. households? A the CPI B the GDP deflator C the PPI Deflation occurs when the average level of prices A falls rises Between 2001 and 2008, which country experienced very rapid hyperinflation? The velocity of money is usually A constant (fixed) B stable and predictable C volatile and unpredictable Inflation is A always and everywhere a monetary phenomenon B moderate or non-existent under commodity-money standards C both A and B are true Changes in the money supply can change real GDP in the A long run B short run Inflation is more volatile and less predictable when the inflation rate is A high B low Money illusio is when people mistake A changes in nominal prices for changes in real prices B changes in real prices for changes in nominal prices

Answer 1

Measure of inflation:

• A. the CPI.

The reason being that the CPI (cost price index) is the measure of change in the market value/price of a basket of goods from year to year. The household would be concerned more with the market price rather than the GDP deflator or product price index.

Deflation:

• A. falls.

The inflation is when the average price level increases, while the opposite case is deflation, in which average price level decreases.

The country that experienced very rapid hyperinflation between 2001 and 2008 is Zimbabwe. Zimbabwe saw an inflation where the price level increased by hundreds of million times between the specified period, stopped printing currency then and recently brought even demonetization to tackle the problem.

Velocity of money:

• Stable and Predictable.

According to the monetarists, the velocity of money is not constant, and does changes from time to time, but is stable and predictable in the short run (yet in past 3 decades, it is indeed unpredictable and unstable, but that is due to macro-economic fluctuation in those times).

Inflation is:

• C. both A and B are true.

As according to Friedman, one of the most influential monetarist, the inflation is always and everywhere a monetary phenomenon. The reason being that the misunderstanding of validity of inflation and unemployment trade-off in long and short run often misleads the government to reduce unemployment by altering the money supply leads to inflation. Also, under commodity-money standard, which attempts to measure money in real terms from time to time, inflation is moderate or non-existent.

Changes in the money supply:

• B. short run.

The real GDP is about the same in the long run as the long run AS curve is supposedly vertical. The changes in GDP in both fiscal and monetary policy takes place in the short run only.

Inflation:

• high.

When inflation rate is low or even moderate, it is predictable, as it is a sign of macro-economic stability. In case inflation rate is high, situation becomes quite out of hand and unpredictable.

Money illusion:

• A. changes in nominal prices for changes in real prices.

Change in nominal prices are neutralized by change in wages, but if it is misunderstood, the money illusion is on act. When this happens, people think change in nominal price is the change in real price, and as a result, they temporarily change their usual labor input.