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Review Questions

Review Questions

11.

How is a basket of goods and services used to measure the price level?

12.

Why are index numbers used to measure the price level rather than dollar value of goods?

13.

What is the difference between the price level and the rate of inflation?

14.

Why does substitution bias arise if the inflation rate is calculated based on a fixed basket of goods?

15.

Why does the quality/new goods bias arise if the inflation rate is calculated based on a fixed basket of goods?

16.

Imagine that an economy experiences a 10 percent increase in wages, economy-wide. Is this likely to cause demand-pull or cost-push inflation?

17.

What has been a typical range of inflation in the U.S. economy in the last decade or so?

18.

Over the last century, during what periods was the U.S. inflation rate highest and lowest?

19.

What is deflation?

20.

Identify several parties likely to be helped and hurt by inflation.

21.

What is indexing?

22.

Name several forms of indexing in the private and public sector.