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Inflation: Price Confusion & Money Illusion Practice Questions

1. Inflation increases: *

a. All prices, including wages.

b. All prices, except wages.

c. Prices of input goods only.

d. Prices of finished goods only.

2. Inflation interferes with the price system in which costly way? *

a. Inflation raises all prices so that consumers must pay more than they make.

b. Inflation distorts price signals, making it difficult for consumers to tell if the price increase is due to scarcity or inflation, and react appropriately.

c. Inflation wastes seller resources, as they spend time and money changing prices.

d. Inflation wastes buyer resources as they engage in more searching for lower prices.

3. Money illusion is the phrase used to describe when people mistake: *

a. Changes in prices with changes in costs.

b. Changes in prices with changes in quality.

c. Changes in nominal prices with changes in wages.

d. Changes in nominal prices with changes in real prices.

4. Which type of inflation is described as worrisome and costly? *

a. Low and steady.

b. High and steady.

c. High and volatile.

d. Low and volatile.

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