EC102: CLASS 5 LT
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
1.
•
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.
1.
•
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.
Explain.
Prices change due to other reasons but preferences
1.
•
Makes it hard to distinguish overall from relative price changes
Prices are sticky
1.
•
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
bonds
• 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