1.Inflation occurs when the price level:

A)rises and then falls.

B)changes.

C)increases continuously.

D)increases one year only.

2.Suppose workers bargain for a new contract that gives them a 5 percent pay increase over the next year. If they expected no inflation and inflation is in fact 2 percent, inflation makes:

A)both workers and firms better off.

B)both workers and firms worse off.

C)workers better off and firms worse off.

D)workers worse off and firms better off.

3.Social security payments have been adjusted for inflation annually since the late 1970s yet it is sometimes argued that the true cost of living for retirees on social security rises less than the cost of living adjustment used by the government. If this is the case, retirees:

A)would be better off if the government cost of living adjustment more accurately reflected the true cost of living for retirees.

B)benefit from using the government's cost of living adjustment rather than a more accurate cost of living adjustment.

C)are protected from inflation by the government's inflation adjustment.

D)are hurt by inflation even with the government's inflation adjustment.

4.Suppose inflation is expected to be 4 percent but is in fact only 3 percent. This:

A)helps borrowers but hurts lenders.

B)helps lenders and borrowers.

C)helps lenders but hurts borrowers.

D)hurts lenders and borrowers.

5.The short-run aggregate supply curve will shift up if:

A)productivity is increasing faster than wages.

B)wages decrease.

C)productivity increases.

D)wages are increasing faster than productivity.

6.Annual inflation in Zimbabwe was 32 percent in 1998, 383 percent in 2003, and increased to more than 1,000 percent in 2007. What would a classical economist who sees great merit in the quantity theory of money look for in trying to explain this rise in inflation?

A)Very low interest rates

B)A poor distribution of income

C)A very low rate of unemployment

D)A rapid increase in the quantity of money in circulation

7.The velocity of money is:

A)the average number of times each dollar is spent each year.

B)the average number of months a dollar is held before being spent.

C)inversely related to output.

D)constant.

8.Planeload

***Bolivars is the name of Venezuela's currency.***

CARACASMillions of pounds of provisions, stuffed into three-dozen 747 cargo planes, arrived here from countries around the world in recent months to service Venezuela's crippled economy.

But instead of food and medicine, the planes carried another resource that often runs scarce here: bills of Venezuela's currency, the bolivar.

The shipments were part of the import of at least five billion bank notes that President Nicols Maduro's administration authorized over the latter half of 2015 as the government boosts the supply of the country's increasingly worthless currency, according to seven people familiar with the deals.

And the Venezuelan government isn't finished. In December, the central bank began secret negotiations to order 10 billion more bills, five of these people said, which would effectively double the amount of cash in circulation. That order alone is well above the eight billion notes the U.S. Federal Reserve and the European Central Bank each print annuallydollars and euros that unlike bolivars are used world-wide.

Four spokesmen from Venezuela's central bank didn't respond to calls and emails seeking comment.

Economists say the purchases could exacerbate Venezuela's economic meltdown: injecting large numbers of freshly printed notes is likely to stoke inflation, which the International Monetary Fund estimates will this year hit 720%, the world's highest rate.

Central-bank data show Venezuela in 2015 more than doubled monetary liquidity, a measure used to gauge all money in the economy, including bank deposits.

Printing more bolivars is weakening the currency further. This week, the bolivar broke the psychologically important level of 1,000 per dollar for the first time on the country's thriving black market.

The country has several official exchange rates, including 6.3 bolivars to the dollar. On Wednesday the country's trade and investment minister, Jess Fara, called for an overhaul of currency controls. "It's evident that the current currency regime has exhausted itself," he said in an interview.

Venezuela's 30 million people can't seem to get cash fast enough, said Steve H. Hanke, an expert on troubled currencies at Johns Hopkins University. "People want cash because they want to get rid of it as fast as they can," he said.

While use of credit cards and bank transfers is up, Venezuelans have to carry stacks of cash as many vendors try to avoid transaction fees. Dinner at a nice restaurant can cost a brick-size stack of bills. A cheese-stuffed corn cakecalled an arepasells for nearly 1,000 bolivars, requiring 10 bills of the highest-denomination 100-bolivar bill, each worth less than 10 U.S. cents.

Rigid state price controls have only made matters worse, economists say, generating a thriving black market for just about every good, from car tires to baby diapers, in which cash is the preferred form of payment.

The bank-note buying spree is costing the cash-strapped leftist government hundreds of millions of dollars, said all seven of the people, who have been briefed on the deals Venezuela has entered with bank-note producers.

The high cost of the printing binge is an especially heavy burden as Venezuela reels from the oil-price collapse and 17 years of free-spending socialist rule that have left state finances in shambles.

Most countries around the world have outsourced bank-note printing to private companies that can provide sophisticated anticounterfeiting technologies like watermarks and security strips. What drives Venezuela's orders is the sheer volume and urgency of its currency needs.

The central bank's own printing presses in the industrial city of Maracay don't have enough security paper and metal to print more than a small portion of the country's bills, the people familiar with the matter said. Their difficulties stem from the same dollar shortages that have plagued Venezuela's centralized economy, as the Maduro administration struggles to pay for imports of everything, including cancer medication, toilet paper and insect repellent to battle the mosquito-borne Zika virus.

That means Venezuela has to buy bolivars from abroad at any cost. "It's easy money for a lot of these companies," one of the people with details on the negotiations said.

The huge order for 10 billion notes can't be satisfied by a single firm, the people familiar with the deals said. So it has generated interest from some of the world's largest commercial printers, each vying for a piece of the pie at a time when low profits in bank-note printing have pushed many of them to cut back on capacity.

According to the people familiar with the deals, the companies include the U.K.'sDe La Rue(Links to an external site.)

,the Canadian Bank Note Co., France's Oberthur Fiduciaire and a subsidiary of Munich-based Giesecke & Devrient, which printed currency in 1920s Weimar Germany, when citizens hauled wheelbarrows of cash to buy bread. More recently, the German technology companywas the source of security paper for Zimbabwe(Links to an external site.)

when it was stricken in 2008 with a hyperinflation episode in which prices doubled daily.

All of the printing firms declined to comment.

Currency experts say the logistical challenges of importing and storing massive quantities of bank notes underscore an undeniable truth: Venezuela is spending a lot more than it needs because the government hasn't printed a higher-denomination bank noterevealing a misplaced fear, analysts say, that doing so would implicitly acknowledge high inflation the government publicly denies.

"Big bills do not cause inflation. Big bills are the result of inflation."

Owen W. Linzmayer, a San Francisco-based bank-note expert

"Big bills do not cause inflation. Big bills are the result of inflation," said Owen W. Linzmayer, a San Francisco-based bank-note expert and author who catalogs world currencies. "Larger bills can actually save money for the central bank because instead of having to replace 10 deteriorated notes, you only need five or one," he said.

The Venezuelan central bank's latest orders have been exclusively only for 100- and 50-bolivar notes, according to the seven people familiar with the deals, because 20s, 10s, 5s and 2s are worth less than the production cost.

Mr. Maduro and his allies say galloping consumer prices reflect a capitalist conspiracy to destabilize the government.

The president in late December changed a law to give himself full control over the central bank, stripping congressional oversight just as his political opponents took control of the National Assembly for the first time in 17 years.

"To stop excessive printing we have to undo that law and restore autonomy to the central bank," said Elas Matta, an opposition lawmaker who focuses on state finances.

Central-bank data shows Venezuela more than doubled the supply of 100-, 50- and 2-bolivar notes in 2015 as it doubled monetary liquidity, a measure used to gauge all money in the economy, including bank deposits. Supply has grown even as Venezuela has fewer U.S. dollars to support new bolivars, a result of falling oil prices.

"To stop excessive printing we have to...restore autonomy to the central bank."

Elas Matta, an opposition lawmaker

The flood of money has led some sectors of the economy, such as real estate and car sales, to effectively price their goods in U.S. dollars, though they do so on the sly because dealing in foreign currency is illegal. On the crime-ridden streets of Caracas, people in the security industry say, professional kidnap-and-ransom teams often demand U.S. currency instead of bolivars.

A color photocopy of a 100-bolivar bill costs more than the note. In an image that went viral on social media, a diner is shown using a 2-bolivar note to hold a greasy fried turnover because it is cheaper than a napkin.

Some ATMs limit withdrawals to around 6,000 bolivars a dayless than $6 on the unofficial market. Even so, the machines often run out of cash. And in a sign of how quickly freshly printed bolivars are rushed into the economy, the serial numbers on crisp bills dispensed by ATMs are often in sequential order.

What clear is that there is little respect for the beleaguered bolivar, regardless of what form it takes.

On a recent day, a 46-year-old slum-dweller named Mario walked the streets of a wealthy district of Caracas with a megaphone, calling on residents to sell him their coins, which he gathered into a rolling water cooler. The idea: to melt it down later.

"You can make an amazing ring," said Mario, who wouldn't give his last name but said he preferred to go by his nickname, Moneda, or "Coins."

***Bolivars is the name of Venezuela's currency.***

According to the article, the source of inflation in Venezuela is due to the ___________________.

A)increase in printing of their bolivar currency

B)an increase in the printing of U.S. dollars

C)higher interest rate in Venezuela

D)lower interest rate in the U.S.

9.Split in inflation

Inflation has been a puzzle in the U.S. economy for years, failing to move up much when the unemployment rate tumbled.

To resolve the discrepancy, it helps to look at the U.S. as two economies rather than one.

On one hand is the goods economy, where products like computers, gasoline and hair dryers are made and purchased, and where Americans spend roughly one-third of their money. On the other hand is the services economy, where cable guys, nurses and bus drivers jostle for the bulk of consumer spending.

The goods economy has been transformed by trade and technological innovation over several decades, giving consumers access to inexpensive products made in foreign countries or automated factories. The services economy has been more sheltered from international competition and technological change. You can't hire cheap Chinese labor to serve you pizza or a robot to teach your ninth-grader English.

"You can have technological innovations that lower the price of TVs, but our technology for, you know, haircuts doesn't change as much," says Michael Feroli, the chief U.S. economist at JPMorgan.

The divergence between goods and services price inflation is especially important now because of the unusual behavior of consumer prices.

Economic theory holds that as unemployment falls and labor becomes scarcer, wages and inflation should rise. But the theoryknown as the Phillips curve, after 20th century economist William Phillipshasn't held up very well in the past decade. Since 2009, the unemployment rate has fallen from a peak of 10% to an 18-year low of 3.9% in April, yet overall inflation has remained stubbornly low, running under the Fed's 2% target for most of the expansion.

A number of current and former Fed officials have wondered if the Phillips curve is dead. At a Federal Open Market Committee rate-setting meeting this year, "a couple" of participants "questioned the usefulness" of the model, "citing the limited ability of such frameworks to capture the relationship between economic activity and inflation,"according to the minutes(Links to an external site.)

.

Look at the two economies separately, however, and a more complete picture emerges.

The conventional relationship appears to be holding up in the services economy but not in the goods economy.So far in this expansion, services inflation as measured in the consumer-price index has moved up from near 0.5% to near 3%, a trend that theory suggests should happen as unemployment falls.Something different is happening in the goods economy,where prices have been falling formuch of the past five years as if disconnected from the overall unemployment rate.

"You're going to find that (labor market) slack matters a lot more for services because they tend to be domestically produced," Mr. Feroli said. Other factors, including the value of the dollar or commodities prices matter more for goods, he said, "because they're globally traded."

At the same time, the services economy has been the source of most U.S. job creation in this expansion, growing payrolls by 14% since 2010 to 128 million workers.Employment in the goods economy has yet to return to its precrisis levels.

Some economists saythe revival of inflation in the services economyis one reason not to lose faith in the Phillips curve just yet, andmay bewhy the Fed has been right to raise rates even though inflation has been low.

"Services inflation is good evidence that the Phillips curve process still works, that the domestic economy is still generating some inflation pressure," says Eric Winograd, a senior economist atAllianceBernstein L.P(Links to an external site.)

."That, I think, guided [the Fed] to begin the process of raising rates even while the official headline index had been well below their target."

The Fed's preferred inflation measure, the personal consumption expenditure price index, is now right at its goal of 2%. The Fed seeks 2% inflation as a level consistent with a healthy, growing economy.

Falling unemployment suggests that inflation in services will continue as slack gets wrung out of the domestic economy. One challenge for the Fed: Prices for services tend to be "sticky," meaning they're slow to respond to changes in monetary policy or the broader economy. That means turning them around, should inflation exceed the Fed's target, could become a challenge. Fed officials see inflation rising above 2% in their own projections.

If goods prices remain weak, inflation may not advance much beyond the Fed's target. But if goods prices pick up, the Fed might be staring at an inflation overshoot for the first time in years.

A number of factors could rouse goods prices from their slump, economists say. President Donald Trump threatened last month to impose tariffs on up to $150 billion worth of goods imported from China, the U.S.'s largest trading partner, raising fears of a trade war. Mr. Trump's decision this month to reinstate sanctions on Iran, a major oil producer, has helped send prices for crude to the highest levels since late 2014. A depreciation in the dollar due to large fiscal deficits or other concerns could make imports more expensive.

"That would be messy," said Vincent Reinhart,a former Fed official and the chief economist at Standish Mellon Asset Management."They should actually now be concerned about too much inflation because the thing that is costly to adjust (services inflation)...is already above the goal."

In this inflation chapter you've learned about the 2 different theories on inflation. In addition to theories it is also important to understand how the real world also looks at inflation. Per the article, the economy can be divided into 2 groups. Those 2 groups are _______________________ and ____________________.

A)utilities, agriculture

B)goods , services

C)services; utilities

D)goods, agriculture

agriculture, services

goods, utilities