problem set week 4

# problem set week 4 - 2 Which of the following is an example...

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2. Which of the following is an example of a wealth effect of inflation? A. The price of popcorn rises faster than the price of doughnuts B. The price of carrots rises faster than the income of carrot consumers C. The income of firefighters rises faster than the income of farmers D. The price of land rises faster than the consumer price index The wealth effect refers to the gains and losses in the value of an individual's assets due to inflation. If the price of an asset rises faster than the average of all prices, the wealth effect is positive and the individual has gained because of the inflation. 3. Hyperinflation occurs when: A. Income rises faster than prices B. Prices are falling C. Prices rise faster than income D. The rate of inflation exceeds 200% Hyperinflation refers to a situation when prices rise at extraordinary rates. Generally, inflation is considered to be hyperinflation if the annual rate of price increase exceeds 200%. That means that prices have tripled in one year. 4. If a price index has a value of 125, it means that: A. Prices are 12.5% higher than they were last year B. Prices are 125% higher than they were in the base year C. Prices are 25% higher than they were in the base year D. Prices are 25% higher than they were last year A price index measures what prices are like relative to what they were like in the base year. The value of a price index in the base year is always 100. That means that when the price index is 125, it is 25% higher than in the base year.

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5. Increases in nominal wages caused by pressure from labor unions would cause which kind of inflation? A. Cost-push inflation
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problem set week 4 - 2 Which of the following is an example...

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