Question

1. A widely popular brand of car tyres have consistently given more mileage to the consumers over time which have led to an increase in their prices. However, the inflation rate computed using CPI jumps up considerably because of this. What kind of drawback does the CPI have in this case?

a. New Product Bias

b. Outlet Bias

c. Substitution Bias

d. Quality Bias

2. Which one of the following is a major cost of inflation?

a. Shoeleather Costs.

b. Tax distortions.

c. Menu Costs.

d. All of the other options.

3. Unexpected inflation leads to:

a. Transfer of wealth from creditors to debtors.

b. Transfer of wealth from creditors to creditors.

c. None of the other options are true.

d. Transfer of wealth from debtors to creditors.

4. Which of the following sequences explains the Wealth Effect the best?

a. Price level rises, consumers feel wealthier, consumption spending falls, output demand falls.

b. Price level rises, consumers feel poorer, consumption spending rises, output demanded rises.

c. Price level falls, consumers feel poorer, consumption spending falls, output demanded falls.

d. Price level rises, consumers feel poorer, consumption spending falls, output demanded falls.

5. The Quantity Theory of Money is given by the equation:

a. MV = PY

b. MY=VP

c. MP=VY

d. M/V = P/Y

6. The fundamental equation of the national income accounting identity is given by:

a. Y = C + I + G + X – M

b. Y = C +I + NX

c. Y = C + I + G + M – X

d. Y = C + G + X – M

7. Which of the following can cause a shift of the AD curve?

a. Change in consumption

b. All of them.

c. Change in output.

d. Change in Price

Answer 1

1> d. Quality Bias

Although it is selling the same product, car tyres but there is significant improvement in the quality of it. But, the CPI do not capture the improvement in quality, so it gives rise to quality bias.

2> d. All of the other options.

Due to inflation, price needs to be changed frequently, and this leads to menu cost. There is also shoe-leather cost which is the cost of holding cash and the tax distortion occurs because the tax paid is not adjusted with inflation.

3> a. Transfer of wealth from creditors to debtors.

A debtor is a borrower, so due to unexpected inflation, they have to pay less amount of real value of money and this means there is a transfer of wealth from creditors to debtors.

4>d. Price level rises, consumers feel poorer, consumption spending falls, output demanded falls.

Wealth effect is positive, if the price level rises, then consumers feel they are relatively poorer and thus the spend less and the output demanded also falls.