Unit 6: Inflation and Economic Stability - Practice Quiz

ECO106 — Introduction To Economics 60 Questions
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1 What is inflation?

Introduction to inflation Easy
A. A general rise in prices
B. A general fall in prices
C. A rise in employment
D. A fall in production

2 Which measure is commonly used to track changes in the general price level?

Introduction to inflation Easy
A. Price index
B. Production schedule
C. Trade license
D. Employment register

3 What happens to the purchasing power of money during inflation?

Introduction to inflation Easy
A. It decreases
B. It stays fixed
C. It becomes unlimited
D. It increases

4 What is demand-pull inflation?

Types of inflation Easy
A. Inflation caused by lower wages
B. Inflation caused by higher unemployment
C. Inflation caused by falling demand
D. Inflation caused by excess demand

5 What is cost-push inflation?

Types of inflation Easy
A. Inflation caused by lower consumer spending
B. Inflation caused by falling production costs
C. Inflation caused by rising production costs
D. Inflation caused by increased saving

6 Which type of inflation occurs when prices rise very rapidly?

Types of inflation Easy
A. Deflation
B. Seasonal inflation
C. Disinflation
D. Hyperinflation

7 What does disinflation mean?

Types of inflation Easy
A. A permanent increase in output
B. A slower rate of price increase
C. A sudden rise in unemployment
D. A complete fall in all prices

8 Which situation can directly cause demand-pull inflation?

Causes of inflation Easy
A. A decrease in household income
B. A fall in business investment
C. Rapid growth in consumer spending
D. A reduction in money supply

9 Which of the following is an example of a higher production cost?

Causes of inflation Easy
A. A reduction in factory rent
B. An increase in fuel prices
C. A decrease in transport costs
D. A fall in raw material prices

10 How can an excessive increase in the money supply contribute to inflation?

Causes of inflation Easy
A. It immediately lowers all wages
B. It prevents firms from selling goods
C. It may increase spending demand
D. It always reduces total demand

11 Which event may reduce the supply of goods and cause prices to rise?

Causes of inflation Easy
A. A natural disaster
B. A larger harvest
C. A fall in transport delays
D. A productivity increase

12 How does unexpected inflation usually affect people who lend money at a fixed interest rate?

Impact of inflation on different sectors Easy
A. It removes all lending risk
B. It increases their real return
C. It reduces their real return
D. It guarantees higher savings

13 Who may benefit from unexpected inflation when they have fixed-rate debt?

Impact of inflation on different sectors Easy
A. Cash savers
B. Borrowers
C. Fixed-income workers
D. Lenders

14 Why can inflation harm people with fixed incomes?

Impact of inflation on different sectors Easy
A. Their income buys fewer goods
B. Their savings gain purchasing power
C. Their income rises automatically
D. Their taxes always disappear

15 How may inflation affect business planning?

Impact of inflation on different sectors Easy
A. It can fix all future costs
B. It can increase uncertainty
C. It can remove market competition
D. It can guarantee stable profits

16 Which institution usually conducts monetary policy?

Measures to control inflation through monetary policy Easy
A. The trade union
B. The local council
C. The private retailer
D. The central bank

17 Which monetary policy measure can reduce inflation by making borrowing more expensive?

Measures to control inflation through monetary policy Easy
A. Reducing reserve requirements
B. Increasing credit availability
C. Raising interest rates
D. Lowering interest rates

18 What is the likely effect of selling government securities by a central bank?

Measures to control inflation through monetary policy Easy
A. It lowers production costs
B. It increases money in circulation
C. It guarantees higher exports
D. It reduces money in circulation

19 Which fiscal policy action can help reduce demand-pull inflation?

Measures to control inflation through fiscal policy Easy
A. Reducing government spending
B. Reducing tax collection
C. Increasing government spending
D. Increasing transfer payments

20 How can higher taxes help control inflation?

Measures to control inflation through fiscal policy Easy
A. They can lower every production cost
B. They can reduce disposable income
C. They can expand the money supply
D. They can increase household spending

21 The consumer price index rises from 120 to 126 over one year. What is the approximate inflation rate?

Introduction to inflation Medium
A. 5%
B. 20%
C. 6%
D. 3%

22 Why does a sustained increase in the general price level reduce the purchasing power of money?

Introduction to inflation Medium
A. The money supply automatically disappears
B. Interest rates always become negative
C. Export prices always fall
D. Each unit of money buys fewer goods

23 If nominal wages rise by 4% while prices rise by 7%, what happens approximately to real wages?

Introduction to inflation Medium
A. They rise by 3%
B. They remain unchanged
C. They fall by 3%
D. They fall by 11%

24 A sudden increase in fuel prices raises transportation and production costs across the economy. Which type of inflation best describes this situation?

Medium
A. Imported disinflation
B. Demand-pull inflation
C. Structural deflation
D. Cost-push inflation

25 Households increase spending rapidly because of higher incomes, while production capacity remains nearly unchanged. What type of inflation is most likely?

Medium
A. Stagflation
B. Demand-pull inflation
C. Cost-push inflation
D. Deflation

26 An economy experiences high inflation, stagnant output, and rising unemployment after a major energy shock. This combination is known as:

Medium
A. Reflation
B. Stagflation
C. Disinflation
D. Hyperdeflation

27 Inflation falls from 8% to 4%, but the average price level continues to rise. Which term describes this situation?

Medium
A. Disinflation
B. Deflation
C. Hyperinflation
D. Recession

28 The government increases spending substantially without raising taxes, and total demand exceeds the economy's productive capacity. What is the most likely result?

Medium
A. Demand-pull inflation
B. A permanent trade surplus
C. Lower aggregate demand
D. Cost-saving deflation

29 A central bank keeps interest rates very low for an extended period while credit expands rapidly. Which inflationary pressure may result?

Medium
A. Excess aggregate demand
B. Reduced money circulation
C. Falling asset demand
D. Lower consumer borrowing

30 A country's currency depreciates sharply, making imported food and machinery more expensive. This may cause inflation mainly through:

Medium
A. Lower domestic demand
B. Higher imported input costs
C. Lower import costs
D. Reduced production expenses

31 Workers negotiate higher wages after observing earlier price increases, and firms raise prices to cover their higher labor costs. This pattern is called:

Medium
A. A liquidity trap
B. A wage-price spiral
C. A productivity boom
D. A balance-of-payments surplus

32 Unexpected inflation is most likely to benefit which group, assuming their incomes do not adjust immediately?

Medium
A. Fixed-rate borrowers
B. Fixed-income pensioners
C. People holding cash
D. Lenders with fixed returns

33 Why can unexpected inflation harm savers who keep their wealth in cash?

Medium
A. Cash values rise with all prices
B. Cash earns a guaranteed real return
C. Inflation reduces cash's purchasing power
D. Inflation eliminates all saving decisions

34 A firm has long-term contracts with fixed selling prices while its input costs rise unexpectedly. What is the likely short-run effect?

Medium
A. Unchanged production costs
B. Higher profit margins
C. Automatic productivity growth
D. Lower profit margins

35 Which group is generally most vulnerable when inflation rises faster than wages and benefits are adjusted?

Medium
A. Workers with indexed wages
B. Borrowers with variable incomes
C. Firms with flexible prices
D. People on fixed incomes

36 To reduce demand-pull inflation, a central bank raises the policy interest rate. What is the most direct expected effect?

Medium
A. Reduced credit demand
B. Lower saving incentives
C. Cheaper borrowing
D. Higher excess demand

37 How can selling government securities in the open market help control inflation?

Medium
A. It guarantees lower taxes
B. It raises export subsidies
C. It increases bank reserves
D. It withdraws money from circulation

38 If a central bank increases the required reserve ratio, commercial banks will generally have:

Medium
A. Less capacity to create loans
B. A guaranteed increase in profits
C. Lower demand for reserves
D. More funds available for lending

39 Which fiscal policy combination is most appropriate for reducing demand-pull inflation?

Medium
A. Lower taxes and increased transfers
B. Higher subsidies and lower taxes
C. Lower spending and higher taxes
D. Higher spending and lower taxes

40 During an inflationary period, the government cuts nonessential infrastructure spending. What is the likely short-run macroeconomic effect?

Medium
A. Import prices must increase
B. Aggregate demand decreases
C. Money supply automatically doubles
D. Private consumption becomes zero

41 An economy's price index rises from 125 to 135 while nominal wages rise by 5%. What is the approximate change in workers' real wages?

Introduction to inflation Hard
A. They fall by approximately 3%
B. They fall by approximately 8%
C. They remain unchanged
D. They rise by approximately 3%

42 A country records a 6% increase in its consumer price index, but the prices of imported energy and capital goods rise sharply while domestic consumer prices change little. Which conclusion is most defensible?

Introduction to inflation Hard
A. The CPI necessarily understates core inflation
B. The CPI and GDP deflator can diverge substantially
C. The GDP deflator must also rise by 6%
D. The CPI measures the general price level perfectly

43 An economy experiences rapidly rising prices, widespread shortages, frequent repricing, and a public shift from money into real assets. Which classification best describes this situation?

Types of inflation Hard
A. Hyperinflationary inflation
B. Demand-pull inflation
C. Disinflation caused by tight credit
D. Mild creeping inflation

44 Real output falls, unemployment rises, and the price level continues increasing after a major energy-price shock. Which label best captures the macroeconomic condition?

Types of inflation Hard
A. Deflation
B. Demand-led expansion
C. Stagflation
D. Imported disinflation

45 Headline inflation rises because of a temporary food-price shock, while inflation excluding food and energy remains stable. What is the most accurate interpretation?

Types of inflation Hard
A. Underlying inflation has permanently accelerated
B. The economy has entered demand-pull inflation
C. Core inflation is temporarily higher
D. Headline inflation is temporarily higher

46 Suppose the money supply grows by 12%, real output grows by 4%, and velocity is constant. Under the quantity theory approximation, what inflation rate is implied?

Causes of inflation Hard
A. Approximately 4%
B. Approximately 8%
C. Approximately 16%
D. Approximately 12%

47 A government finances a persistent deficit by borrowing from the central bank, while the economy is already near full employment. Which mechanism most directly creates inflationary pressure?

Causes of inflation Hard
A. Higher private saving reduces aggregate demand
B. Monetized deficits increase nominal spending
C. Tax increases raise disposable income
D. Lower money growth reduces the price level

48 Workers negotiate higher wages after observing past inflation, and firms raise prices to preserve profit margins. This process then influences future wage negotiations. What is this mechanism called?

Causes of inflation Hard
A. Demand destruction
B. Wage-price spiral
C. Liquidity preference trap
D. External debt deflation

49 A currency depreciates sharply in an import-dependent economy with low short-run price elasticity of demand for fuel. Which first-round effect is most likely?

Causes of inflation Hard
A. Domestic wages immediately decline
B. Export prices rise in foreign currency
C. Imported input costs increase
D. The money multiplier automatically falls

50 Unexpected inflation occurs, and a household has fixed nominal deposits while a firm has a long-term fixed-rate loan. Which distributional outcome is most likely?

Impact of inflation on different sectors Hard
A. Both parties gain equally
B. The household gains and the firm loses
C. Neither party is affected
D. The household loses and the firm gains

51 If tax brackets and depreciation allowances are not indexed to inflation, which combination is most likely during sustained inflation?

Impact of inflation on different sectors Hard
A. Fiscal drag and overstated taxable profits
B. Automatic deflation and higher real deductions
C. Lower tax burdens and understated profits
D. No distortion because nominal values adjust

52 A pension system provides fixed nominal benefits, while prices rise unexpectedly by 10%. Which group is most directly exposed to a decline in real purchasing power?

Impact of inflation on different sectors Hard
A. Borrowers with variable-rate loans
B. Recipients of fixed nominal pensions
C. Workers with indexed wages
D. Exporters receiving foreign currency

53 Inflation becomes volatile and unpredictable, even though its average rate remains moderate. Which consequence is most likely for long-term investment?

Impact of inflation on different sectors Hard
A. Shorter planning horizons
B. Lower uncertainty premiums
C. Guaranteed higher real returns
D. More efficient price signals

54 A country experiences inflation caused mainly by imported food and energy, while low-income households spend a larger share of income on these goods. What is the likely distributional effect?

Impact of inflation on different sectors Hard
A. The shock benefits all consumers equally
B. The shock is strongly progressive
C. The shock affects only capital owners
D. The shock is regressive

55 The central bank raises its policy interest rate, but inflation expectations remain anchored and banks hold substantial excess reserves. Which outcome is most plausible in the short run?

Measures to control inflation through monetary policy Hard
A. An automatic increase in bank lending
B. A weak initial effect on broad money creation
C. A direct increase in real potential output
D. A guaranteed immediate collapse in inflation

56 Which policy combination is most likely to reduce demand-pull inflation without relying solely on changes in the policy interest rate?

Measures to control inflation through monetary policy Hard
A. Currency depreciation and larger asset purchases
B. Open-market sales and higher reserve requirements
C. Lower discount rates and directed credit expansion
D. Open-market purchases and lower reserve requirements

57 A central bank wants to reduce inflation but faces a negative supply shock that has already reduced output. Why might aggressive monetary tightening create a difficult policy trade-off?

Measures to control inflation through monetary policy Hard
A. It raises demand while reducing unemployment immediately
B. It increases potential output through cheaper credit
C. It can lower demand while worsening the output decline
D. It eliminates the supply shock without adjustment costs

58 During an overheated economy, which fiscal package is most likely to reduce aggregate demand while limiting the direct burden on low-income households?

Measures to control inflation through fiscal policy Hard
A. Higher progressive taxes and protected essential transfers
B. Lower taxes and cuts in unemployment benefits
C. Higher infrastructure spending and broad tax rebates
D. Uniform consumption taxes and reduced food assistance

59 A government cuts fuel taxes to reduce measured inflation, but the economy has excess demand and fuel consumption is price-inelastic. What is the main limitation of this policy?

Measures to control inflation through fiscal policy Hard
A. It increases the tax burden on fuel consumers
B. It may lower the price index but sustain excess demand
C. It necessarily reduces real household income
D. It directly eliminates imported supply constraints

60 If public debt is high and inflation is driven by excess aggregate demand, which fiscal action is most likely to strengthen anti-inflation credibility?

Measures to control inflation through fiscal policy Hard
A. A credible reduction in the structural deficit
B. A temporary increase in broad transfers
C. A larger deficit financed by short-term borrowing
D. A permanent unfunded tax reduction