Christina Ammon
Quiz Question 1
 The rate of inflation is the:
 A. median level of prices.
 B. average level of prices.
 C. percentage change in the level of prices.
 D. measure of the overall level of prices.
Essay 5 Question c
Describe the two main measures of inflation
Percentage change in Consumer Price Index
value of a fixed basket of goods at a certain date
• measures the “cost of living
• Measures price changes weighted by importance of goods in budget
• Doesn’t measure changes different compositions of baskets
Percentage change in the GDP Deflator.
Nominal GDP/Real GDP *100
• Nominal GDP - current prices, Real GDP - base year prices
• Does not include imported goods
Essay 5 Question d
Inflation interferes with the market allocation mechanism.
Prices change due to other reasons but preferences
Makes it hard to distinguish overall from relative price changes
Prices are sticky
Creates relative price changes if not all firms are able to adjust prices at
the same speed
Quiz Question 2
In the case of an unanticipated inflation:
 A. creditors with an unindexed contract are hurt because they
get less than they expected in real terms.
 B. creditors with an indexed contract gain because they get
more than they contracted for in nominal terms.
 C. debtors with an unindexed contract do not gain because
they pay exactly what they contracted for in nominal terms.
 D. debtors with an indexed contract are hurt because they pay
more than they contracted for in nominal terms.
Quiz Question 3
 If inflation is 6 percent and a worker receives a 4 percent wage
increase, then the worker's real wage:
A. increased 4 percent.
B. increased 2 percent.
C. decreased 2 percent.
D. decreased 6 percent.
Essay 4 Question a
Faced with a negative demand shock, the central bank needs
to strike a balance between doing “too much” and doing “too
little”. Explain.
 Central bank faces trade-off between increasing output and
decreasing inflation
 Can work as demand shock itself
 If too much – output surpasses natural rate - generates inflation
 If too little – output stays low = recession
Essay 5 Question c
When will a monetary expansion not result in inflation?
Essay 5 Question f
Explain why disinflation is costly.
 What is disinflation? What is deflation?
 Depends on expectations
 If unexpected disinflation
• Whenever inflation is lower than expectations
• Prices increase more than money supply
• Real Money Balances fall
• Equivalent of a demand shock
What happens if disinflation is expected?
Essay 5 Question g
In ending a hyperinflation, it is useful to have a “nominal
anchor”. Explain.
Quiz Question 4
In practice, in order to stop a hyperinflation, in addition to
stopping monetary growth, the government must:
 A. lower taxes and raise government spending.
 B. raise taxes and reduce government spending.
 C. change from one kind of currency to another.
 D. call for a new election.
Question 4
 If a central bank drops money from a helicopter
• It won’t affect interest rates as there is no corresponding purchase of
• It will have the same effects as an OMO for the same amount
• Will affect demand positively through lower interest rates and negatively
through inflation
• Combines elements of monetary and fiscal stimulus

EC102: CLASS 5 LT Christina Ammon