Title: Identify the consequences of inflation
Course: TEST Course

Q: Inflation makes certain things less valuable in real terms, including:
- real estate and precious metals.
- your full college scholarship.
- anything expressed in dollars.
A: anything expressed in dollars.

Q: Identify which of the following answers in real terms, are made less valuable by inflation?
- Precious metals and real estate.
- A full college scholarship.
- Everything expressed in dollars.
A: Everything expressed in dollars.

Q: In 1985 inflation in Israel reached a record 500%. How did this period of high inflation affect market adjustments towards equilibrium price and quantity?
- Markets could not adjust to equilibrium.
- Markets adjusted to equilibrium faster than before.
- Markets adjusted to equilibrium more erratically and slowly.
A: Markets adjusted to equilibrium more erratically and slowly.

Q: In 1989-90 inflation in Poland reached over 600%. How did this high inflation affect market adjustments towards equilibrium quantity and price?
- Markets could not adjust to equilibrium.
- Markets adjusted to equilibrium faster than before.
- Markets adjusted to equilibrium more erratically and slowly.
A: Markets adjusted to equilibrium more erratically and slowly.

Q: Inflation increases uncertainty in the markets because:
- sellers raise the prices of their products very gradually and predictably.
- consumers may put less effort into shopping to find the best price.
- it is more difficult to stay aware of how one product compares in cost to another.
A: it is more difficult to stay aware of how one product compares in cost to another.

Q: Why does Inflation increase uncertainty in the markets?
- Because sellers raise the prices very gradually and predictably for their products .
- Because consumers compare prices less in their shopping activities to find the cheapest deal.
- Because it is harder to stay aware of how one product cost compares to another.
A: Because it is harder to stay aware of how one product cost compares to another.

Q: Under ideal conditions inflation should not have any blurring effect on price signals. If wages and prices are rising at a constant 20% then individuals should be able to adjust their expectations accordingly. For example, if the price of bread increased by 20% and the price of the input flour also rose by 20%, the sellers should know that the real price of bread has not changed. The market equilibrium quantity and price has not changed. Why does inflation in the real world result in shortages and surpluses?
- Sellers care more about nominal prices than real prices of goods.
- Input prices are rarely affected by inflation.
- Price adjustments are not synchronized or smooth.
A: Price adjustments are not synchronized or smooth.

Q: If the economy was running with ideal conditions, inflation wouldn’t be blurring the price signals. If prices and wages rise at a consistent 15% then people could shift their expectations. As an example, if the price of eggs increased by 15% and the price of the input chicken feed also rose by 15%, the sellers should know that the real price of eggs has not changed. The market equilibrium price and quantity has not changed. In the real world why does inflation actually result in shortages and surpluses?
- Sellers care more about nominal prices than real prices of goods.
- Input prices are rarely affected by inflation.
- The changes to prices are not smooth or synchronized.
A: The changes to prices are not smooth or synchronized.

Q: The redistribution of purchasing power due to unexpected inflation benefits which group of people?
- elderly persons on pensions with cost-of-living adjustments
- home buyers with adjustable rate mortgages
- students with fixed-rate educational loans
A: students with fixed-rate educational loans

Q: Which group of people is harmed by the redistribution of purchasing power due to unexpected inflation?
- home buyers with adjustable rate mortgages
- students with variable-rate educational loans
- lenders
A: lenders

Q: During the 1970s when inflation accelerated, middle-class Americans benefited primarily because
- nominal wages fell.
- inflation always benefits the middle class.
- the value of their mortgage debts decreased in real terms.
A: the value of their mortgage debts decreased in real terms.

Q: With accelerated inflation In the 1980s middle-class Americans benefited primarily because
- nominal wages fell.
- The middle class always benefits from inflation.
- in real terms, their home mortgage debts decreased in value.
A: in real terms, their home mortgage debts decreased in value.

Q: This past year inflation in Snowdonia has increased to 150%. As an economic analyst, you are charged with identifying those sectors of the population worst affected by this inflation event. Which group of people is likely to be worst affected by inflation?
- pensioners drawing from a “defined contribution” retirement plan
- homeowners with a 30 year fixed mortgage
- disabled veterans living on fixed (non-adjustable) government transfer payments
A: disabled veterans living on fixed (non-adjustable) government transfer payments

Q: Last year the country of Barboo had its inflation increase by 200%. You work for the Barboo government as an economist and have been given the task to identify the sectors of Barboo’s population that are affected by this inflation the worst. Which of the following group is probably the worst affected by inflation?
- homeowners in Barboo with a 15 year fixed mortgage
- retirees getting distributions from a “defined contribution” retirement plan
- veterans existing on fixed (non-adjustable) government payments
A: veterans existing on fixed (non-adjustable) government payments

Q: Tony’s grandfather is close to retirement from his job of 40 years at the automotive manufacturer. The grandfather has a defined benefit plan for his retirement and is looking forward to having that same amount coming to him for the rest of his life. Tony has just learned about inflation and its redistribution of purchasing power. Tony wants to give his grandfather good advice so that his grandfather’s purchasing power will be able to keep up with inflation. What can Tony advise his grandfather to do to minimize the purchasing power inflation impact over time?
- Tony advises his grandfather to take the fixed benefit plan option and have a fixed amount of money distributed to him over their lifetime with no worries.
- Tony advises his grandfather to retire early and take out all of his money, paying the early withdrawal penalty and move to Florida.
- Tony advises his grandfather to start a business with his retirement funds and keep his money working for him to keep up with inflation.
A: Tony advises his grandfather to start a business with his retirement funds and keep his money working for him to keep up with inflation.

Q: You have older parents who have been saving for retirement for decades. They are now getting close to retirement age and are looking at their options. One would like to leave everything in the pension fund and draw out a fixed, unchangeable amount over their retirement time. Your other parent wants to take out a chunk of retirement funds and purchase a business and use the profit from it to generate funds on which to live. You have noticed that inflation over the last year is on a rapid rise. What would you advise your parents to do based on what you know of inflation and its redistribution of purchasing power?
- You would advise them to take the fixed benefit plan option so they could count on a fixed amount of money distributed to them over their lifetime.
- You would advise them to retire early and take out all of their money, paying the early withdrawal penalty and start their cruise around the world now.
- You would advise them to buy a business with their retirement funds and keep their money working for them to keep up with inflation.
A: You would advise them to buy a business with their retirement funds and keep their money working for them to keep up with inflation.

Q: After a prolonged period of high inflation the government of Atlantia decides to set a target of 0% inflation going forward. As the new assistant economic minister, you are tasked with critiquing this policy. Which criticism of the 0% inflation target is best supported by the economic literature?
- It is undisputed that too little inflation interferes with the downward adjustment of real wages.
- Moderate to high inflation is popular among consumers.
- A 0% inflation target could lead to deflation.
A: A 0% inflation target could lead to deflation.

Q: After a prolonged period of high inflation the government of Oceania decides to set a target of 0% inflation going forward. As the new assistant economic minister, you are tasked with critiquing this policy. Which criticism of the 0% inflation target is plausible yet controversial among economists?
- A 0% inflation target could lead to deflation.
- Moderate to high inflation is popular among consumers.
- Too little inflation interferes with the downward adjustment of real wages.
A: Too little inflation interferes with the downward adjustment of real wages.

Q: Using your understanding of economic history and inflation, which inflation target is most advisable?
- 10-20%
- 0%
- 1-2%
A: 1-2%

Q: After learning about inflation and some of its history, what would be the inflation target that is most advisable for an economy?
- 15-20%
- 0%
- 1-2%
A: 1-2%

Q: How may low inflation actually assist labor markets adjust towards equilibrium?
- It increases the living standard of workers by diminishing their fixed debt.
- It forces more frequent renegotiation of labor contracts.
- It allows for the gradual downward adjustment of real wages.
A: It allows for the gradual downward adjustment of real wages.

Q: What is the one of the reasons low inflation may actually assist labor markets adjust towards equilibrium?
- Low inflation increases the living standard of workers by diminishing their fixed debt.
- Low inflation forces more frequent renegotiation of labor contracts.
- Low inflation allows for the gradual downward adjustment of real wages.
A: Low inflation allows for the gradual downward adjustment of real wages.

Q: In the last few decades the car manufacturing sector has found it difficult to compete with foreign car imports. High labor costs is one of the main reasons economist site as the lack of competitiveness for the car manufacturing industry. If there was modest inflation, how could it possibly help the car manufacturing industry in the United States compete with foreign car manufacturers?
- The consumers of the cars have increased purchasing power.
- Business loans would cost less for the U.S. car manufacturers.
- It could allow real wages to downwardly adjust more easily.
A: It could allow real wages to downwardly adjust more easily.

Q: In the last few decades the electronics manufacturing sector has found it difficult to compete with electronics from foreign competitors. High labor costs is one of the main reasons economist site as the lack of competitiveness for the electronics manufacturing industry. If there was modest inflation how could it possibly help the electronics manufacturing industry compete?
- The consumers of the electronics have increased purchasing power.
- Business loans would cost less for the U.S. electronics manufacturers.
- It could allow real wages to downwardly adjust more easily.
A: It could allow real wages to downwardly adjust more easily.