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 fall in production
C. A general fall in prices
D. A rise in employment

2 Which 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

3 What 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

4 What 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

5 What 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

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

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

7 What 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

8 Which 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

9 Which 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

10 How 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

11 Which 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

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 reduces their real return
C. It guarantees higher savings
D. It increases their real return

13 Who 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

14 Why 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

15 How 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

16 Which 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

17 Which 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

18 What 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

19 Which 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

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 increase household spending
C. They can reduce disposable income
D. They can expand the money supply

21 The 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%

22 Why 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

23 If 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%

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

25 Households 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

26 An 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

27 Inflation 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

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

29 A 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

30 A 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

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

32 Unexpected 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

33 Why 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

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

35 Which 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

36 To 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

37 How 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

38 If 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

39 Which 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

40 During 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

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 rise by approximately 3%
D. They remain unchanged

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 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

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. Mild creeping inflation
B. Disinflation caused by tight credit
C. Hyperinflationary inflation
D. Demand-pull 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. Imported disinflation
B. Demand-led expansion
C. Stagflation
D. Deflation

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. 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

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 16%
C. Approximately 8%
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. Lower money growth reduces the price level
B. Higher private saving reduces aggregate demand
C. Tax increases raise disposable income
D. Monetized deficits increase nominal spending

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. Liquidity preference trap
B. Demand destruction
C. External debt deflation
D. Wage-price spiral

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. The money multiplier automatically falls
D. Imported input costs increase

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. 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

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. 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

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. Workers with indexed wages
C. Recipients of fixed nominal pensions
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. More efficient price signals
B. Lower uncertainty premiums
C. Shorter planning horizons
D. Guaranteed higher real returns

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 regressive
C. The shock is strongly progressive
D. The shock affects only capital owners

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. 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

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. 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

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 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

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 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

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 directly eliminates imported supply constraints
B. It increases the tax burden on fuel consumers
C. It necessarily reduces real household income
D. It may lower the price index but sustain excess demand

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 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