Finals - Macro Module 3 (Ii)

Front 1

refers to increases in the price level resulting from an excess of demand over output at the existing price level, caused by an increase in aggregate demand.

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Demand-pull inflation

Front 2

T/F

Changes in the price are usually caused by an excess of total spending beyond the economy’s capacity to produce.

Where inflation is rapid and sustained, the cause invariably is an overissuance of money by the central bank

Back 2

True

Front 3

T/F

Inflation may also arise on the supply or cost side of the economy. During some periods in the Philippines economic history, the price level increased even though total spending was not excessive.

These were periods when output and employment were both declining (evidence that total spending was not excessive) while the general price level was rising.

Back 3

TRUE

Front 4

refers to increases in the price level resulting from an increase in resource costs (e.g., raw material prices) and hence in per-unit production costs.

In other words, it is inflation caused by reductions in aggregate supply (McConnell and Brue, 2004).

Back 4

Cost-push inflation

Front 5

T/F

The theory of cost-push inflation explains rising prices in terms of factors that raise per-unit production costs at each level of spending.

Back 5

True

Front 6

is the average cost of a particular level of output.

Back 6

per-unit production cost

Front 7

costs are pushing the price level upward, whereas in demand-pull inflation demand is pulling it upward.

The major source of cost-push inflation has been so-called

Back 7

supply shocks.

Front 8

T/F

It is easy to distinguish between demand-pull inflation and cost-push inflation unless the original source of inflation is known.

Back 8

False - difficult

Front 9

True or fase

Another complexity is that cost-push inflation and demand-pull inflation differ in their sustainability.

Back 9

True

Front 10

T/F

Cost-push inflation will continue as long as there is excess total spending.

Demand-pull inflation is automatically self-limiting; it will die out by itself.

Back 10

False -

Demand-pull inflation will continue as long as there is excess total spending.

Cost-push inflation is automatically self-limiting; it will die out by itself.

Front 11

t/f

cost-push inflation generates a recession. And in a recession, households and businesses concentrate on keeping their resources employed, not on pushing up the prices of those resources.

Back 11

true

Front 12

is the number of pesos received as wages, rent, interest, or profits.

Back 12

Nominal income

Front 13

is a measure of the amount of goods and services nominal income can buy; it is the purchasing power of nominal income, or income adjusted for inflation.

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Real income

Front 14

an income receiver may be able to avoid or lessen the adverse effects of inflation on real income.

Back 14

fully expected or anticipated inflation

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– i.e., inflation whose full extent was not expected.

Back 15

unanticipated inflation

Front 16

hurts fixed-income recipients, savers, and creditors.

It redistributes real income away from them and toward others.

Back 16

Unanticipated inflation

Front 17

People whose incomes are fixed see their real incomes fall when inflation occurs.

Back 17

Fixed-Income Receivers.

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Unanticipated inflation hurts _

As prices rise, the real value or purchasing power of an accumulation of savings deteriorates

Back 18

Savers

Front 19

Who is Unaffected or Helped by Inflation

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Flexible-Income Receivers

Debtors

Front 20

Some union workers also get automatic _ (COLA) in their pay when the CPI rises, although such increases rarely equal the full percentage rise in inflation.

Back 20

cost-of-living adjustments

Front 21

The redistribution effects of inflation are less severe or are eliminated altogether if people anticipate inflation and can adjust their nominal incomes to reflect the expected price-level rises

Back 21

Anticipated Inflation

Front 22

The lender can avoid this subsidy by charging an _ _ – i.e., by raising the interest rate by 6 percent – the amount of the anticipated inflation.

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inflation premium

Front 23

is the percentage increase in purchasing power that the borrower pays the lender.

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real interest rate

Front 24

is the percentage increase in money that the borrower pays the lender, including that resulting from the built-in expectation of inflation, if any.

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nominal interest rate

Front 25

Three final points on the redistribution effects of inflation:

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• Deflation

• Mixed effects

• Arbitrariness

Front 26

declines in the price level – are the reverse of those of inflation.

People with fixed nominal incomes will find their real incomes enhanced.

Creditors will benefit at the expense of debtors. And savers will discover that the purchasing power of their savings has grown because of the falling prices.

Back 26

Deflation

Front 27

A person who is an income earner, a holder of financial assets, and an owner of real assets simultaneously will probably find that the redistribution impact of inflation is cushioned

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• Mixed effects

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The redistribution effects of inflation occur regardless of society’s goals and values. Inflation lacks a social conscience and takes from some and gives to others, whether they are rich, poor, young, old, healthy, or infirm.

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• Arbitrariness.

Front 29

T/F

inflation may also affect an economy’s level of real output (and thus its level of real income). The direction and significance of this effect on output depends on the type of inflation and its severity.

Back 29

True

Front 30

Abrupt and unexpected rises in key resource prices, such as oil, can sufficiently drive up overall production costs to cause cost-push inflation.

As prices rise, the quantity of goods and services demanded falls. So, firms respond by producing less output, and unemployment goes up. In short, _ reduces real output. It redistributes a decreased level of real income.

Back 30

cost-push inflation

Front 31

is an extremely rapid inflation whose impact on real output and employment usually is devastating.

Back 31

Hyperinflation

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reactions of the different economic agents and variables:

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 Business owners do not know what to charge for their products.

 Consumers do not know what to pay.

 Resource suppliers want to be paid with actual output, rather than with rapidly depreciating money.

 Creditors avoid debtors to keep them from repaying their debts with cheap money.

 Money eventually becomes almost worthless and ceases to do its job as a medium of exchange.

 The economy may be thrown into a state of barter, and production and exchange drop dramatically.

Front 33

The net result is economic, social, and possibly political chaos.

it has precipitated monetary collapse, depression, and sociopolitical disorder.

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hyperinflation