Inflation is a sustained increase in the general price level of goods and services.
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2Which measure is commonly used to track changes in the general price level?
Introduction to inflation
Easy
A.Trade license
B.Production schedule
C.Employment register
D.Price index
Correct Answer: Price index
Explanation:
A price index measures the average change in prices over time.
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3What happens to the purchasing power of money during inflation?
Introduction to inflation
Easy
A.It becomes unlimited
B.It decreases
C.It increases
D.It stays fixed
Correct Answer: It decreases
Explanation:
When prices rise, the same amount of money buys fewer goods and services.
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4What is demand-pull inflation?
Types of inflation
Easy
A.Inflation caused by lower wages
B.Inflation caused by falling demand
C.Inflation caused by excess demand
D.Inflation caused by higher unemployment
Correct Answer: Inflation caused by excess demand
Explanation:
Demand-pull inflation occurs when total demand grows faster than the economy's ability to produce goods and services.
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5What is cost-push inflation?
Types of inflation
Easy
A.Inflation caused by rising production costs
B.Inflation caused by increased saving
C.Inflation caused by falling production costs
D.Inflation caused by lower consumer spending
Correct Answer: Inflation caused by rising production costs
Explanation:
Cost-push inflation results when higher costs of inputs, such as wages or raw materials, raise prices.
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6Which type of inflation occurs when prices rise very rapidly?
Types of inflation
Easy
A.Disinflation
B.Deflation
C.Hyperinflation
D.Seasonal inflation
Correct Answer: Hyperinflation
Explanation:
Hyperinflation is an extremely rapid and usually uncontrolled increase in prices.
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7What does disinflation mean?
Types of inflation
Easy
A.A slower rate of price increase
B.A complete fall in all prices
C.A sudden rise in unemployment
D.A permanent increase in output
Correct Answer: A slower rate of price increase
Explanation:
Disinflation occurs when inflation continues but at a lower rate.
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8Which situation can directly cause demand-pull inflation?
Causes of inflation
Easy
A.A reduction in money supply
B.Rapid growth in consumer spending
C.A decrease in household income
D.A fall in business investment
Correct Answer: Rapid growth in consumer spending
Explanation:
Rapidly increasing consumer spending can raise total demand and push prices upward.
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9Which of the following is an example of a higher production cost?
Causes of inflation
Easy
A.An increase in fuel prices
B.A reduction in factory rent
C.A fall in raw material prices
D.A decrease in transport costs
Correct Answer: An increase in fuel prices
Explanation:
Higher fuel prices increase the cost of producing and transporting many goods.
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10How can an excessive increase in the money supply contribute to inflation?
Causes of inflation
Easy
A.It always reduces total demand
B.It prevents firms from selling goods
C.It immediately lowers all wages
D.It may increase spending demand
Correct Answer: It may increase spending demand
Explanation:
A rapidly growing money supply can encourage spending, increasing demand and prices.
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11Which event may reduce the supply of goods and cause prices to rise?
Causes of inflation
Easy
A.A productivity increase
B.A natural disaster
C.A fall in transport delays
D.A larger harvest
Correct Answer: A natural disaster
Explanation:
A natural disaster can reduce production and supply, placing upward pressure on prices.
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12How 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 reduces their real return
C.It guarantees higher savings
D.It increases their real return
Correct Answer: It reduces their real return
Explanation:
Inflation reduces the purchasing power of the money received by lenders.
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13Who may benefit from unexpected inflation when they have fixed-rate debt?
Impact of inflation on different sectors
Easy
A.Cash savers
B.Fixed-income workers
C.Borrowers
D.Lenders
Correct Answer: Borrowers
Explanation:
Borrowers repay loans with money that has lower purchasing power than expected.
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14Why can inflation harm people with fixed incomes?
Impact of inflation on different sectors
Easy
A.Their taxes always disappear
B.Their savings gain purchasing power
C.Their income rises automatically
D.Their income buys fewer goods
Correct Answer: Their income buys fewer goods
Explanation:
If income does not rise with prices, people on fixed incomes experience a lower real standard of living.
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15How may inflation affect business planning?
Impact of inflation on different sectors
Easy
A.It can guarantee stable profits
B.It can fix all future costs
C.It can remove market competition
D.It can increase uncertainty
Correct Answer: It can increase uncertainty
Explanation:
Changing prices make it harder for firms to predict costs, revenues, and profits.
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16Which institution usually conducts monetary policy?
Measures to control inflation through monetary policy
Easy
A.The trade union
B.The private retailer
C.The local council
D.The central bank
Correct Answer: The central bank
Explanation:
The central bank manages monetary policy and influences money supply and interest rates.
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17Which monetary policy measure can reduce inflation by making borrowing more expensive?
Measures to control inflation through monetary policy
Easy
A.Increasing credit availability
B.Reducing reserve requirements
C.Raising interest rates
D.Lowering interest rates
Correct Answer: Raising interest rates
Explanation:
Higher interest rates discourage borrowing and spending, which can reduce demand pressure.
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18What is the likely effect of selling government securities by a central bank?
Measures to control inflation through monetary policy
Easy
A.It increases money in circulation
B.It guarantees higher exports
C.It lowers production costs
D.It reduces money in circulation
Correct Answer: It reduces money in circulation
Explanation:
Selling securities takes money from buyers, reducing the amount of money available for spending.
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19Which fiscal policy action can help reduce demand-pull inflation?
Measures to control inflation through fiscal policy
Easy
A.Reducing tax collection
B.Reducing government spending
C.Increasing government spending
D.Increasing transfer payments
Correct Answer: Reducing government spending
Explanation:
Lower government spending reduces total demand in the economy.
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20How can higher taxes help control inflation?
Measures to control inflation through fiscal policy
Easy
A.They can lower every production cost
B.They can increase household spending
C.They can reduce disposable income
D.They can expand the money supply
Correct Answer: They can reduce disposable income
Explanation:
Higher taxes may leave households with less disposable income to spend, reducing demand pressure.
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21The consumer price index rises from 120 to 126 over one year. What is the approximate inflation rate?
Introduction to inflation
Medium
A.3%
B.5%
C.20%
D.6%
Correct Answer: 5%
Explanation:
The inflation rate is calculated as .
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22Why does a sustained increase in the general price level reduce the purchasing power of money?
Introduction to inflation
Medium
A.Interest rates always become negative
B.Export prices always fall
C.The money supply automatically disappears
D.Each unit of money buys fewer goods
Correct Answer: Each unit of money buys fewer goods
Explanation:
When the general price level rises, the same amount of money purchases fewer goods and services.
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23If nominal wages rise by 4% while prices rise by 7%, what happens approximately to real wages?
Introduction to inflation
Medium
A.They fall by 11%
B.They remain unchanged
C.They fall by 3%
D.They rise by 3%
Correct Answer: They fall by 3%
Explanation:
Real wage growth is approximately nominal wage growth minus inflation: .
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24A sudden increase in fuel prices raises transportation and production costs across the economy. Which type of inflation best describes this situation?
Medium
A.Demand-pull inflation
B.Cost-push inflation
C.Imported disinflation
D.Structural deflation
Correct Answer: Cost-push inflation
Explanation:
Cost-push inflation occurs when rising input costs cause firms to increase prices.
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25Households increase spending rapidly because of higher incomes, while production capacity remains nearly unchanged. What type of inflation is most likely?
Medium
A.Demand-pull inflation
B.Deflation
C.Cost-push inflation
D.Stagflation
Correct Answer: Demand-pull inflation
Explanation:
Demand-pull inflation occurs when aggregate demand grows faster than the economy's ability to produce goods and services.
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26An economy experiences high inflation, stagnant output, and rising unemployment after a major energy shock. This combination is known as:
Medium
A.Disinflation
B.Reflation
C.Stagflation
D.Hyperdeflation
Correct Answer: Stagflation
Explanation:
Stagflation combines persistent inflation with weak economic growth and high unemployment.
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27Inflation falls from 8% to 4%, but the average price level continues to rise. Which term describes this situation?
Medium
A.Recession
B.Disinflation
C.Deflation
D.Hyperinflation
Correct Answer: Disinflation
Explanation:
Disinflation means that the inflation rate is decreasing, while prices are still increasing more slowly.
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28The government increases spending substantially without raising taxes, and total demand exceeds the economy's productive capacity. What is the most likely result?
Medium
A.Lower aggregate demand
B.Demand-pull inflation
C.Cost-saving deflation
D.A permanent trade surplus
Correct Answer: Demand-pull inflation
Explanation:
Expansionary government spending can increase aggregate demand beyond available output, creating upward pressure on prices.
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29A central bank keeps interest rates very low for an extended period while credit expands rapidly. Which inflationary pressure may result?
Medium
A.Lower consumer borrowing
B.Reduced money circulation
C.Excess aggregate demand
D.Falling asset demand
Correct Answer: Excess aggregate demand
Explanation:
Low interest rates can encourage borrowing and spending, increasing aggregate demand and inflationary pressure.
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30A country's currency depreciates sharply, making imported food and machinery more expensive. This may cause inflation mainly through:
Medium
A.Lower import costs
B.Lower domestic demand
C.Higher imported input costs
D.Reduced production expenses
Correct Answer: Higher imported input costs
Explanation:
Currency depreciation raises the domestic-currency price of imports, increasing production and consumer costs.
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31Workers 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 balance-of-payments surplus
B.A liquidity trap
C.A productivity boom
D.A wage-price spiral
Correct Answer: A wage-price spiral
Explanation:
A wage-price spiral occurs when rising prices lead to higher wages, which then contribute to further price increases.
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32Unexpected inflation is most likely to benefit which group, assuming their incomes do not adjust immediately?
Medium
A.Lenders with fixed returns
B.Fixed-rate borrowers
C.People holding cash
D.Fixed-income pensioners
Correct Answer: Fixed-rate borrowers
Explanation:
Unexpected inflation reduces the real value of fixed debt repayments, benefiting borrowers and disadvantaging lenders.
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33Why can unexpected inflation harm savers who keep their wealth in cash?
Medium
A.Inflation eliminates all saving decisions
B.Cash earns a guaranteed real return
C.Inflation reduces cash's purchasing power
D.Cash values rise with all prices
Correct Answer: Inflation reduces cash's purchasing power
Explanation:
When prices rise unexpectedly, money held as cash buys fewer goods and services.
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34A firm has long-term contracts with fixed selling prices while its input costs rise unexpectedly. What is the likely short-run effect?
Medium
A.Lower profit margins
B.Higher profit margins
C.Unchanged production costs
D.Automatic productivity growth
Correct Answer: Lower profit margins
Explanation:
If selling prices are fixed but input costs increase, the difference between revenue and costs becomes smaller.
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35Which group is generally most vulnerable when inflation rises faster than wages and benefits are adjusted?
Medium
A.Firms with flexible prices
B.People on fixed incomes
C.Borrowers with variable incomes
D.Workers with indexed wages
Correct Answer: People on fixed incomes
Explanation:
People receiving fixed payments may be unable to maintain their usual consumption when prices rise.
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36To reduce demand-pull inflation, a central bank raises the policy interest rate. What is the most direct expected effect?
Medium
A.Lower saving incentives
B.Reduced credit demand
C.Higher excess demand
D.Cheaper borrowing
Correct Answer: Reduced credit demand
Explanation:
Higher interest rates make borrowing more expensive, reducing credit-financed consumption and investment.
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37How can selling government securities in the open market help control inflation?
Medium
A.It withdraws money from circulation
B.It guarantees lower taxes
C.It raises export subsidies
D.It increases bank reserves
Correct Answer: It withdraws money from circulation
Explanation:
When the central bank sells securities, buyers pay for them, reducing liquidity and limiting excessive spending.
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38If a central bank increases the required reserve ratio, commercial banks will generally have:
Medium
A.More funds available for lending
B.Lower demand for reserves
C.Less capacity to create loans
D.A guaranteed increase in profits
Correct Answer: Less capacity to create loans
Explanation:
Banks must hold a larger share of deposits as reserves, leaving fewer funds available for lending and deposit creation.
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39Which fiscal policy combination is most appropriate for reducing demand-pull inflation?
Medium
A.Higher spending and lower taxes
B.Lower taxes and increased transfers
C.Lower spending and higher taxes
D.Higher subsidies and lower taxes
Correct Answer: Lower spending and higher taxes
Explanation:
Reducing government spending and increasing taxes lowers aggregate demand and helps ease inflationary pressure.
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40During an inflationary period, the government cuts nonessential infrastructure spending. What is the likely short-run macroeconomic effect?
Medium
A.Aggregate demand decreases
B.Import prices must increase
C.Money supply automatically doubles
D.Private consumption becomes zero
Correct Answer: Aggregate demand decreases
Explanation:
Lower government expenditure directly reduces one component of aggregate demand, helping moderate price pressures.
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41An 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 rise by approximately 3%
D.They remain unchanged
Correct Answer: They fall by approximately 3%
Explanation:
Inflation is approximately . Real wage growth is approximately nominal wage growth minus inflation: .
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42A 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 measures the general price level perfectly
B.The GDP deflator must also rise by 6%
C.The CPI necessarily understates core inflation
D.The CPI and GDP deflator can diverge substantially
Correct Answer: The CPI and GDP deflator can diverge substantially
Explanation:
The CPI measures a consumer basket, including imports, whereas the GDP deflator covers domestically produced final goods and services. Their inflation rates can therefore differ considerably.
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43An 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.Mild creeping inflation
B.Disinflation caused by tight credit
C.Hyperinflationary inflation
D.Demand-pull inflation
Correct Answer: Hyperinflationary inflation
Explanation:
The combination of extremely rapid price increases, collapsing confidence in money, shortages, and substitution toward real assets is characteristic of hyperinflation.
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44Real 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.Imported disinflation
B.Demand-led expansion
C.Stagflation
D.Deflation
Correct Answer: Stagflation
Explanation:
Stagflation combines weak or falling real output and employment with continuing inflation, often following adverse supply shocks.
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45Headline 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.Headline inflation is temporarily higher
B.The economy has entered demand-pull inflation
C.Underlying inflation has permanently accelerated
D.Core inflation is temporarily higher
Correct Answer: Headline inflation is temporarily higher
Explanation:
Headline inflation includes volatile food prices. Core inflation excludes food and energy, so a temporary food shock can raise headline inflation without changing underlying inflation.
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46Suppose 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 16%
C.Approximately 8%
D.Approximately 12%
Correct Answer: Approximately 8%
Explanation:
Using , inflation is approximately money-supply growth plus velocity growth minus real-output growth: .
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47A 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?
Central-bank financing can expand the monetary base. Near full employment, additional nominal demand is more likely to raise prices than substantially increase real output.
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48Workers 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.Liquidity preference trap
B.Demand destruction
C.External debt deflation
D.Wage-price spiral
Correct Answer: Wage-price spiral
Explanation:
A wage-price spiral occurs when higher prices lead to higher wages and higher wages lead firms to raise prices, creating self-reinforcing inflationary momentum.
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49A 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.The money multiplier automatically falls
D.Imported input costs increase
Correct Answer: Imported input costs increase
Explanation:
Depreciation raises the domestic-currency price of imported fuel and other inputs, producing imported cost-push inflation, especially when demand is inelastic.
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50Unexpected 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.The household loses and the firm gains
B.The household gains and the firm loses
C.Both parties gain equally
D.Neither party is affected
Correct Answer: The household loses and the firm gains
Explanation:
Unexpected inflation reduces the real value of fixed nominal deposits and fixed-rate repayments. The saver loses purchasing power, while the borrower repays with less valuable money.
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51If 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.Lower tax burdens and understated profits
B.No distortion because nominal values adjust
C.Automatic deflation and higher real deductions
D.Fiscal drag and overstated taxable profits
Correct Answer: Fiscal drag and overstated taxable profits
Explanation:
Nominal income moving into higher tax brackets creates fiscal drag. Historical-cost depreciation can understate real capital costs, making taxable profits appear larger than they are.
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52A 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.Workers with indexed wages
C.Recipients of fixed nominal pensions
D.Exporters receiving foreign currency
Correct Answer: Recipients of fixed nominal pensions
Explanation:
If pension payments do not adjust with prices, a 10% increase in the price level reduces the quantity of goods and services that those payments can purchase.
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53Inflation 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.More efficient price signals
B.Lower uncertainty premiums
C.Shorter planning horizons
D.Guaranteed higher real returns
Correct Answer: Shorter planning horizons
Explanation:
Unpredictable inflation increases uncertainty about future costs, revenues, and real returns. Firms may therefore postpone long-term investment or prefer shorter contracts.
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54A 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 regressive
C.The shock is strongly progressive
D.The shock affects only capital owners
Correct Answer: The shock is regressive
Explanation:
Low-income households devote a larger proportion of their budgets to necessities such as food and energy, so the same price shock reduces their real income more severely.
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55The 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.A guaranteed immediate collapse in inflation
B.A weak initial effect on broad money creation
C.An automatic increase in bank lending
D.A direct increase in real potential output
Correct Answer: A weak initial effect on broad money creation
Explanation:
When banks hold excess reserves and expectations remain stable, a policy-rate increase may initially have limited effects on lending and broad money, although financial conditions can tighten later.
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56Which 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.Lower discount rates and directed credit expansion
B.Open-market sales and higher reserve requirements
C.Open-market purchases and lower reserve requirements
D.Currency depreciation and larger asset purchases
Correct Answer: Open-market sales and higher reserve requirements
Explanation:
Open-market sales withdraw liquidity, while higher reserve requirements reduce banks' capacity to create deposits and credit. Both tend to restrain aggregate demand.
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57A 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 can lower demand while worsening the output decline
B.It increases potential output through cheaper credit
C.It eliminates the supply shock without adjustment costs
D.It raises demand while reducing unemployment immediately
Correct Answer: It can lower demand while worsening the output decline
Explanation:
Tight monetary policy can reduce inflationary demand but may further lower investment, consumption, and employment when output is already constrained by a supply shock.
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58During 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 infrastructure spending and broad tax rebates
B.Uniform consumption taxes and reduced food assistance
C.Lower taxes and cuts in unemployment benefits
D.Higher progressive taxes and protected essential transfers
Correct Answer: Higher progressive taxes and protected essential transfers
Explanation:
Progressive taxes withdraw purchasing power more from households with greater ability to pay, while protecting essential transfers limits the adverse effect on vulnerable households.
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59A 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
D.It may lower the price index but sustain excess demand
Correct Answer: It may lower the price index but sustain excess demand
Explanation:
A fuel-tax cut can reduce the recorded price level temporarily, but it also supports disposable income and demand. It may therefore ease headline inflation without resolving underlying demand pressure.
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60If 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 temporary increase in broad transfers
B.A credible reduction in the structural deficit
C.A permanent unfunded tax reduction
D.A larger deficit financed by short-term borrowing
Correct Answer: A credible reduction in the structural deficit
Explanation:
Reducing the structural deficit lowers demand over time and can reduce expectations that future deficits will require monetary financing, strengthening confidence in price stability.
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