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# ECON Q & A

Refer to the given information about a hypothetical economy.The rate of inflation

is 110 percent.

is 10 percent.

is 0 percent.

D. cannot be determined from the data.

AACSB: Knowledge Application

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-03Explain how inflation is measured and distinguish between cost-pushinflation and demand-pull inflation.

Test Bank: I Topic: Inflation Type: Table

Which of the followingtypes of unemployment is directlyassociated with insufficient overall demand for goods and services?

search unemployment

wait unemployment

C. cyclical unemployment

D. frictionalunemployment

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-02 Illustrate how unemployment is measured and explain the different types of unemployment.

Test Bank: I Topic: Unemployment

The GDP gap measuresthe difference between

NDP and GDP.

NI and PI.

C. actual GDP and potential GDP.

D. nominal GDP and real GDP.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-02 Illustrate how unemployment is measured and explain the different types of unemployment.

Test Bank: I Topic: Unemployment

A large negative GDP gap implies

an excessof imports over exports.

a low rate of unemployment.

C. ahigh rate of unemployment.

D. a sharplyrising price level.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-02 Illustrate how unemployment is measured and explain the different types of unemployment.

Test Bank: I Topic: Unemployment

The aggregate cost of unemployment can be measured by the

A. amount by which actual GDP exceedspotential GDP.

B. amount by which potential GDP exceeds actual GDP.

excess of real GDP over nominal GDP.

excess of nominal GDP over real GDP.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-02 Illustrate how unemployment is measured and explain the different types of unemployment.

Test Bank: I Topic: Unemployment

If actualGDPis \$500 billion and there is a negative GDP gap of \$10 billion,potential GDP is

A. \$510 billion.

\$490 billion.

\$10 billion.

\$990 billion.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-02 Illustrate how unemployment is measured and explain the different types of unemployment.

Test Bank: I Topic: Unemployment

If actualGDPis \$340 billion and there is a positive GDP gap of \$20 billion,potential GDP is

\$360 billion.

\$660 billion.

C. \$320 billion.

D. \$20 billion.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-02 Illustrate how unemployment is measured and explain the different types of unemployment.

Test Bank: I Topic: Unemployment

If potentialGDPis \$330 billion and there is a positive GDP gap of \$30 billion, actual GDP is

\$300 billion.

\$30 billion.

C. \$360 billion.

D. \$630 billion.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-02 Illustrate how unemployment is measured and explain the different types of unemployment.

Test Bank: I Topic: Unemployment

If potentialGDPis \$400 billion and there is a negative GDP gap of \$15 billion, actual GDP is

A. \$415 billion.

B. \$385 billion.

\$15 billion.

\$785 billion.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-02 Illustrate how unemployment is measured and explain the different types of unemployment.

Test Bank: I Topic: Unemployment

Assume thenatural rate of unemployment in theU.S. economy is 5 percent and the actual rate ofunemployment is 9 percent. According to Okun'slaw, the negative GDP gap as a percentageof potential GDP is

A. 4 percent.

B. 8 percent.

10 percent.

2 percent.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-02 Illustrate how unemployment is measured and explain the different types of unemployment.

Test Bank: I Topic: Unemployment

The relationship betweenthe size of the negativeGDP gap and the unemployment rate is

A. direct.

inverse.

undefined.

direct during recession but inverse during expansion.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-02 Illustrate how unemployment is measured and explain the different types of unemployment.

Test Bank: I Topic: Unemployment

If actual GDP islessthan potential GDP,

potential GDP will fall.

the price level will rise.

investment spending will fall.

D. theactual unemployment rate will behigher than thenatural unemployment rate.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-02 Illustrate how unemployment is measured and explain the different types of unemployment.

Test Bank: I Topic: Unemployment

Full-employment output is also called

zero-unemploymentoutput.

equilibrium output.

C. potential output.

D. zero-savings output.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-02 Illustrate how unemployment is measured and explain the different types of unemployment.

Test Bank: I Topic: Unemployment

69.

Potential Real GDP = \$200 Billion Natural Rate of Unemployment = 6 Percent ActualRate of Unemployment = 12 Percent

Refer to the accompanying data, which is for a specific year in a hypothetical economy for whichOkun's law is applicable. The size of the negativeGDP gap as a percentage of potentialGDP for the economy is

6 percent.

9 percent.

C. 12 percent.

D. 15 percent.

AACSB: Knowledge Application

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-02 Illustrate how unemployment is measured and explain the different types of unemployment.

Test Bank: I Topic: Unemployment

Type: Table

70.

Potential Real GDP = \$200 Billion Natural Rate of Unemployment = 6 Percent ActualRate of Unemployment = 12 Percent

Refer to the accompanying data, which is for a specific year in a hypothetical economy for whichOkun's law is applicable.The amount of output being forgone by the economyis

\$12 billion.

\$15 billion.

\$18 billion.

D. \$24 billion.

AACSB: Knowledge Application

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-02 Illustrate how unemployment is measured and explain the different types of unemployment.

Test Bank: I Topic: Unemployment

Type: Table

71.

Potential Real GDP = \$200 Billion Natural Rate of Unemployment = 6 Percent ActualRate of Unemployment = 12 Percent

Refer to the accompanying data, which isfora specific year in a hypothetical economy for whichOkun's law is applicable.If the unemployment rate in the economyfell to 6 percent, we could conclude that

only structural unemployment remained.

the economy'sproduction possibilities curve shifted outward.

C. the economyhad moved from a point inside its production possibilities curve to a point on or very near the curve.

D. nominal GDP would rise, but real GDP would fall.

AACSB: Knowledge Application

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-02 Illustrate how unemployment is measured and explain the different types of unemployment.

Test Bank: I Topic: Unemployment

Type: Table

Okun's law

measures the trade-off between the rate of inflationand the rate of unemployment.

indicates the number of years it will take for a constantrate of inflationto double the price level.

quantifies the relationship betweennominal and real incomes.

D. shows the relationship between the unemployment rate and the size of the negative GDP gap.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-02 Illustrate how unemployment is measured and explain the different types of unemployment.

Test Bank: I Topic: Unemployment

For every 1 percentagepoint that the actualunemployment rate exceeds the naturalrate, a 2 percentage point negative GDP gap occurs. This is a statement of

A. Taylor's rule.

B. Okun's law.

Say's law.

the Coase theorem.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-02 Illustrate how unemployment is measured and explain the different types of unemployment.

Test Bank: I Topic: Unemployment

Unemployment rates in industrialized nations

A. allexceeded 10 percent at some point during the Great Recession.

B. vary considerably from each other.

tend to be about the same in each country and move together over time.

are less subject to business cycle fluctuations than in nonindustrialized countries.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-02 Illustrate how unemployment is measured and explain the different types of unemployment.

Test Bank: I Topic: Unemployment

Compared to other industrial nations, unemployment rates in the United States

are significantly higher.

are significantly lower.

are significantly higherthan those in Europe and significantly lower than those in Japan.

D. tend to fall somewhere in the middle over time.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-02 Illustrate how unemployment is measured and explain the different types of unemployment.

Test Bank: I Topic: Unemployment

Inflation meansthat

all prices are rising, but at different rates.

all prices are rising at approximately the same rate.

C. prices onaverage are rising, although some particularprices may be falling.

D. real incomes are rising.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-03Explain how inflation is measured and distinguish between cost-pushinflation and demand-pull inflation.

Test Bank: I Topic: Inflation

If the consumerprice index falls from 120 to 116 in a particularyear, the economy has experienced

inflation of 4 percent.

inflation of 3.33 percent.

C. deflationof 3.33 percent.

D. deflation of 4 percent.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-03Explain how inflation is measured and distinguish between cost-pushinflation and demand-pull inflation.

Test Bank: I Topic: Inflation

The consumer price index was 177.1 in 2001 and 179.9 in 2002. Therefore, the rate of inflationin 2002 was about

2.8 percent.

3.4 percent.

C. 1.6 percent.

D. 4.1 percent.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-03Explain how inflation is measured and distinguish between cost-pushinflation and demand-pull inflation.

Test Bank: I Topic: Inflation

The annualrate of inflation can be found by subtracting

the real income from thenominal income.

last year's price index from this year's price index.

this year's price index from last year's price index and dividing the difference by this year's price index.

D. last year's price index from this year'sprice index and dividing the difference by last year's price index.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-03Explain how inflation is measured and distinguish between cost-pushinflation and demand-pull inflation.

Test Bank: I Topic: Inflation

If the ConsumerPrice Index rises from 300 to 333 in a particular year, the rate of inflation in that yearis

A. 11 percent.

33 percent.

91 percent.

10 percent.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-03Explain how inflation is measured and distinguish between cost-pushinflation and demand-pull inflation.

Test Bank: I Topic: Inflation

As applied to the price level, the "rule of 70"indicates that the number of years required for the price level to double can be found by

A. dividing70 into the annual rate of inflation.

B. dividing the annualrate of inflation into 70.

subtracting the annualchange in nominalincomes from 70.

multiplying the annual rate of inflationby 70.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-03Explain how inflation is measured and distinguish between cost-pushinflation and demand-pull inflation.

Test Bank: I Topic: Inflation

Between 1980 and 2000, the price level approximately doubled. The average annual rate of inflationover this 20-year period was about

5.5 percent.

4.7 percent.

C. 3.5 percent.

D. 2.8 percent.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-03Explain how inflation is measured and distinguish between cost-pushinflation and demand-pull inflation.

Test Bank: I Topic: Inflation

Given the annualrate of inflation, the "rule of 70" allows one to

determine whether the inflation is demand-pull or cost-push.

calculate the accompanying rate of unemployment.

determine when the value of a real asset will approach zero.

D. calculate the number of years requiredfor the price level to double.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-03Explain how inflation is measured and distinguish between cost-pushinflation and demand-pull inflation.

Test Bank: I Topic: Inflation

If Fred's annual real incomerises by 8 percent each year, his annual real incomewill double in about

A. 8 to 9 years.

10 to 11 years.

5 to 6 years.

19 to 20 years.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-03Explain how inflation is measured and distinguish between cost-pushinflation and demand-pull inflation.

Test Bank: I Topic: Inflation

If the rate of inflationis 12 percentper year, the price level will double in about

A. 4.1 years.

B. 5.8 years.

10.2 years.

12.4 years.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-03Explain how inflation is measured and distinguish between cost-pushinflation and demand-pull inflation.

Test Bank: I Topic: Inflation

Compared to other industrial nations, inflation rates in the United States are

significantly higher.

significantly lower.

significantly higher than those in Europe and significantly lower than those in Japan.

D. neither significantly higher nor significantly lower.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-03Explain how inflation is measured and distinguish between cost-pushinflation and demand-pull inflation.

Test Bank: I Topic: Inflation

Demand-pull inflation

A. occurs when prices of resourcesrise, pushing up costs and the price level.

B. occurs when total spending exceeds the economy's abilityto provide outputat the existingprice level.

occurs only when the economy has reached its absolute production capacity.

is also called cost-push inflation.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-03Explain how inflation is measured and distinguish between cost-pushinflation and demand-pull inflation.

Test Bank: I Topic: Inflation

Demand-pull inflation

A. occurs when totalspending in the economyis excessive.

is measured differently than cost-push inflation.

can be presenteven during an economic depression.

is also called "hyperinflation."

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-03Explain how inflation is measured and distinguish between cost-pushinflation and demand-pull inflation.

Test Bank: I Topic: Inflation

The phrase "toomuch money chasing too fewgoods" best describes

A. the GDP gap.

B. demand-pull inflation.

cost-push inflation.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-03Explain how inflation is measured and distinguish between cost-pushinflation and demand-pull inflation.

Test Bank: I Topic: Inflation

Unlike demand-pull inflation, cost-push inflation

A. is self-limiting.

drives up the price level.

increases nominal income.

increases real income.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-03Explain how inflation is measured and distinguish between cost-pushinflation and demand-pull inflation.

Test Bank: I Topic: Inflation

Inflation initiated by increases in wages or other resource prices is labeled

demand-pull inflation.

demand-push inflation.

C. cost-pushinflation.

D. cost-pull inflation.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-03Explain how inflation is measured and distinguish between cost-pushinflation and demand-pull inflation.

Test Bank: I Topic: Inflation

Cost-push inflation

is caused by excessivetotal spending.

shifts the nation's production possibilities curve leftward.

C. moves the economyinward from its production possibilities curve.

D. is a mixed blessingbecause it has positive effects on real output and employment.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-03Explain how inflation is measured and distinguish between cost-pushinflation and demand-pull inflation.

Test Bank: I Topic: Inflation

Cost-push inflation may be causedby

a declinein per-unit production costs.

a decrease in wage rates.

C. a negative supplyshock.

D. an increasein resource availability.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-03Explain how inflation is measured and distinguish between cost-pushinflation and demand-pull inflation.

Test Bank: I Topic: Inflation

Rising per-unit production costs are most directlyassociated with

frictional unemployment.

structural unemployment.

demand-pull inflation.

D. cost-pushinflation.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-03Explain how inflation is measured and distinguish between cost-pushinflation and demand-pull inflation.

Test Bank: I Topic: Inflation

Which of the followingwould most likelyoccur during the expansionary phase of the business cycle?

A. demand-pull inflation

cost-push inflation

structural inflation

frictional inflation

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-03Explain how inflation is measured and distinguish between cost-pushinflation and demand-pull inflation.

Test Bank: I Topic: Inflation

Core inflation measures

changes in the prices of the most commonly used goods, includingfood and energy.

underlying changes in the CPI, after accounting for the price volatility of high-techgoods.

C. underlying increases in the CPI after removing volatilefood and energy prices.

D. changes in key input prices.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-03Explain how inflation is measured and distinguish between cost-pushinflation and demand-pull inflation.

Test Bank: I Topic: Inflation

Inflation, as measured by percentage changes in the CPI,

concerns policymakers more than the levelof core inflation.

does not include the most price-flexible goods in the economy.

is generally less volatilethan core inflation.

D. is generally more volatile than core inflation.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-03Explain how inflation is measured and distinguish between cost-pushinflation and demand-pull inflation.

Test Bank: I Topic: Inflation

Which of the followingwould most likelyconcern policymakers?

A. high core inflation and low CPI inflation

high CPI inflation and low core inflation

core inflationand CPI inflation that moved consistently over time

stable core inflation and volatileCPI inflation

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-03Explain how inflation is measured and distinguish between cost-pushinflation and demand-pull inflation.

Test Bank: I Topic: Inflation

Real incomeis found by

dividing nominal income by 70.

multiplying nominal income by 1.03.

dividing the price index (in hundredths) by nominal income.

D. dividing nominal income by the price index (in hundredths).

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-04 Relate how unanticipated inflation can redistribute real income.

Test Bank: I Topic: Redistribution Effects of Inflation

Which of the following formulas is correct?Percentage change in

A. price level approximates percentage change in real income minus percentagechange in nominal income.

B. real income approximates percentagechange in nominalincome minus percentage change in price level.

nominal income approximates percentage change in price level minuspercentage change in real income.

real income approximates percentage change in price level minus percentagechange in nominal income.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-04 Relate how unanticipated inflation can redistribute real income.

Test Bank: I Topic: Redistribution Effects of Inflation

Real incomecan be determined by

dividing the price level by nominalincome.

inflating nominal income for inflation.

dividing the annual rate of inflation into the number "70."

D. deflatingnominal income for inflation.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-04 Relate how unanticipated inflation can redistribute real income.

Test Bank: I Topic: Redistribution Effects of Inflation

Suppose that a person's nominal income rises from \$10,000 to \$12,000 and the consumer price index rises from 100 to 105. The person's real income will

fall by about 20 percent.

fall by about 2 percent.

C. rise by about 15 percent.

D. rise by about 25 percent.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-04 Relate how unanticipated inflation can redistribute real income.

Test Bank: I Topic: Redistribution Effects of Inflation

Recently, a labor union argued that the standard of livingof its memberswas falling. A critic of the union argued that this could not possiblybe true becausethe union had been receiving increases in the nominal incomes of its membersthrough collective bargaining. Is the critic correct?

A. Yes, because when you have a large nominal income, your standard of living automatically increases.

B. No, becausereal income may fall if prices increasemore proportionately than the increasein nominal income.

No, because real income may fall if prices increaseless proportionately than the increases in nominalincome.

Yes, because real income may fall if prices increase less proportionately than the increases in nominal income.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-04 Relate how unanticipated inflation can redistribute real income.

Test Bank: I Topic: Redistribution Effects of Inflation

Suppose that a person'snominal income rises by 5 percent and the price level rises from 125 to 130. The person's real income will

fall by about 1 percent.

remain constant.

rise by about 4 percent.

D. rise by about 1 percent.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-04 Relate how unanticipated inflation can redistribute real income.

Test Bank: I Topic: Redistribution Effects of Inflation

In 2010, Tatum'snominal income rose by 4.6 percent and the price level rose by 1.6 percent. We can concludethat Tatum's real income

may have either increased or decreased.

rose by approximately 6.2 percent.

C. rose by approximately 3 percent.

D. fellbyapproximately 13 percent.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-04 Relate how unanticipated inflation can redistribute real income.

Test Bank: I Topic: Redistribution Effects of Inflation

In which of the following cases would real income rise?

A. Nominal income rises by 8 percent,and the price levelrises by 10 percent.

B. Nominalincome rises by 2 percent, and the price level remains unchanged.

Nominal income falls by 4 percent,and the price level falls by 2 percent.

Real income willrisein all of these cases.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 09-04 Relate how unanticipated inflation can redistribute real income.

Test Bank: I Topic: Redistribution Effects of Inflation

Under which of the followingcircumstances would we observethe greatest increase in real income?

A. Nominalincome falls by 2 percent,and the price level falls by 10 percent.

Nominal income rises by 8 percent, and the price levelrises by 4 percent.

Nominal income rises by 15 percent, and the price level rises by 12 percent.

Nominal income falls by 4 percent, and the price levelrises by 6 percent.