Chapter 26 ECON

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Okun’s law

shows the realtionship between the unemployment rate and the size of the negative GDP gap

For every 1 % point that actual unemployment rate exceeds the natural rate, a 2% point negative GDP gap occurs

Okun’s law


prices on average are rising, although some particular prices may be falling

If the consumer price index falls from 120 to 116 in a particular year, the economy has experienced:

deflation of 3.33 percent

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


The annumal rate of inflation can be found by subtracting:

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

If the Consumer Price Index rises from 300 to 333 in a particular year, the rate of inflation in that year is:

11 percent

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

dividing the annual rate of inflation into "70"

Between 1980 and 2000 the price level approximately doubled. The average annual rate of inflation over this 20 year period was about:

3.5 percent

Given the annual rate of inflation the "rule of 70" allows for one to:

Calculate the number of years required for the price level to double

If Fred’s annunal income rises by 8 percent each year, his annual real income will double in about:

8-9 years

If the rate of inflation is 12 percent per year, the price level will double in about:

6 years

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

neither significantly higher nor significantly lower

Demand pull inflation:

occurs when total spending exceeds the economy’s ability to provide output at the existing price level

Demand pull inflation:

occurs when total spending in the economy is excessive

The phrase " too much money chasing too few goods" best describes:

demand pull inflation

Unlike demand pull inflation, cost push inflation:

is self limiting

Inflation initiated by increases in wages or other resources prices is labeled:

Cost pull inflation

Cost push inflation

moves the economy inward from its production possibilities curve

Cost push inflation

a negative supply shock

Rising per unit production costs are most directly associated with:

Cost push inflation

Which of the following would most likely occur during the expansionary phase of the buisness cycle?

demand pull inflation

Real income is found by:

dividing nominal income by the price index(in hundreths)

Which of the following formulas is correct? Percentage change in:

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

Real income can be determined by:

Deflating nominal income for inflation

Recently a labor union argued that the standard of living of its members was falling. A critic of the union argued that this could not possibly be true because the union had been acquiring increases in the nominal incomes of its members through collective bargaining. Is this critic correct?

No, becuase real income may fall if prices increase less proportionately than the increase in nominal income

Suppose that a person’s nominal income rises by 5 percent and the price level rises from 125 to 130. The person’s income will:

remain constant

Cost push inflation

reduced real output

Cost of living adjustment clauses (COLAs)

tie wage increases to changes in the price level

During a peroid of hyperinflation

people tend to hold goods rather than money

Infaltion is undesirable becuse it:

arbitrarily redistributes real income and wealth

Who is least likely to be hurt by unanticipated inflation?

An owner of a small buisness

A lender need not be penalized by inflation if the:

lender correctly anticipates inflation and increases the nominal interest rate accordingly

Unanticipated inflation:

Reduces the real burden of the public debt to the Federal Government

Inflation affects:

both the level and the distribution of income

If both the real interest rate and the nominal interest rate are 3 percent, then the:

inflation premium is zero

Suppose the nominal annual interest reate on a two year loan is 8 percent and lenders expect inflation to be 5 percent in each of the two years. The annual real rate of interest is:

3 percent

Suppose that lenders want to recieve a real rate of interest of 5 percent, and that they expect inflation to remain steady at 2 percent in the coming years. Based on this, lenders should charge a nominal interest rate of:

7 percent

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