Unit 6: Inflation and Economic Stability - Practice Quiz

1 What is inflation?

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

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

4 What is demand-pull inflation?

5 What is cost-push inflation?

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

7 What does disinflation mean?

8 Which situation can directly cause demand-pull inflation?

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

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

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

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

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

14 Why can inflation harm people with fixed incomes?

15 How may inflation affect business planning?

16 Which institution usually conducts monetary policy?

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

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

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

20 How can higher taxes help control inflation?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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?

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?

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?

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?

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?

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?

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?

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?

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?

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?

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

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?

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

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?

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?

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

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?

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

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?

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?