1. Suppose a basket of goods and services has been selected to calculate the consumer price index (CPI) and 2016 has been selected as the base year. In 2016, the basket's cost was $1,000; in 2017, the basket's cost was $1,100; and in 2018, the basket's cost was $1,550. Calculate the inflation rate between 2017 and 2018.

A. 10%

B. 40.9%

C. 45%

D. 55%

E. There is not enough information to determine the inflation rate.

2. If the price of industrial plastic injection molding machines rose by 20% and the price of oranges fell by 20%, then

A. the consumer price index (CPI) would remain unchanged.

B. the CPI would rise if oranges had a greater weight.

C. the CPI would rise because plastic injection molding machines are not a consumer good.

D. the CPI would rise because people buy more oranges than plastic injection molding machines.

E. all else equal, the consumer price index (CPI) would fall, because oranges are a consumer good and injection molding machines are not.

3. Hyperinflation...

A. occurs when the inflation rate is negative.

B. occurs when there is a large decrease in money supply.

C. substantially decreases the value of money.

D. is good for economic growth.

E. can help increase real wages.

4. For each of the following separate situations, determine the associated problem of inflation.

A. It is expected that inflation rate will rise significantly. Hence, many borrowers take a fixed-rate loan. (future price level uncertainty, price confusion, shoe leather cost, tax distortion, money illusion, wealth redistribution, menu cost)

B.Inflation can be costly to a company. Because of inflation, companies need to change prices and reprint advertisements. (future price level uncertainty, price confusion, shoe leather cost, tax distortion, money illusion, wealth redistribution, menu cost)

C. I do not understand why coal prices rise so much. Is it due to inflation or a rise in demand? (future price level uncertainty, price confusion, shoe leather cost, tax distortion, money illusion, wealth redistribution, menu cost)

D. I do not want to buy stocks. My investment gain is not adjusted for inflation, and I pay too much tax. (future price level uncertainty, price confusion, shoe leather cost, tax distortion, money illusion, wealth redistribution, menu cost)

E. As the value of money goes down because of inflation, people spend a lot of time looking for good financial investment strategies. That is quite time consuming. (future price level uncertainty, price confusion, shoe leather cost, tax distortion, money illusion, wealth redistribution, menu cost)

F. My nominal wages go up. I am now much richer and I can buy more luxury items. (future price level uncertainty, price confusion, shoe leather cost, tax distortion, money illusion, wealth redistribution, menu cost)

G. I do not want to borrow money to start my business now. Inflation rate is fluctuating so much that the revenue received in the future may not cover the cost of production. (future price level uncertainty, price confusion, shoe leather cost, tax distortion, money illusion, wealth redistribution, menu cost)

H. Many people relocate to a new city for getting a job with higher wages. Yet they may not take into account of differences in the cost of living. (future price level uncertainty, price confusion, shoe leather cost, tax distortion, money illusion, wealth redistribution, menu cost)

5. For each of the following statements, determine if it is true of false.

A. When real wages rise, we can conclude that the economy is experiencing a deflation (True or false)

B. If prices of 60 percent of the goods and services in the consumption basket increase and prices of 40 percent of goods and services in the basket decrease, CPI will definitely go up (True or false)

C. When GDP deflator rises, CPI may go up, go down or remain unchanged (True or false)

D. When CPI falls, we can conclude that the economy is experiencing a deflation (True or false)

E. The weight of good A in the consumption basket is 20 percent. The weight of good B in the consumption basket is 5 percent. If the price of good A rises by 10 percent and the price of good B falls by 10 percent, CPI will rise if everything else remains the same (True or false)

F. When inflation occurs and nominal wages rise, real wages definitely fall (True/False)