Explain how an increase in your nominal income and a decrease in your
Income might occur simultaneously. What effects does inflation have on the
purchasing power of the dollar?
2. What is the CPI and how is it determined each month? Show how the BLS
calculates the inflation rate from one year to the next.
3. Explain the difference between nominal and real interest rates.
How are creditors and debtors affected during inflation? Give an example.
4. How does deflation differ from inflation?
5. Explain how hyperinflation might lead to a severe decline in total output.
6. Distinguish between demand-pull and cost-push inflation. Which of the two
types is associated with negative GDP gap? Associated with Positive GDP
gap.
7. Evaluate how each of the following individuals would be affected by inflation of
10% or more per year.
a. A pensioned railroad worker.
b. A department-store clerk.
c. A unionized automobile assembly-line worker.
d. A heavily indebted farmer.
e. A retired business executive whose current income comes from interest on government bonds.
f. The owner of an independent small-town department store.
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