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Unit 6 - Practice Quiz

ECO113

1 Which of the following best defines inflation?

A. A sustained decrease in the general price level of goods and services.
B. A sustained increase in the general price level of goods and services.
C. A one-time increase in the price of a specific commodity.
D. An increase in the purchasing power of money.

2 If the inflation rate is positive but decreasing over time (e.g., from 5% to 3%), this phenomenon is known as:

A. Deflation
B. Hyperinflation
C. Disinflation
D. Stagflation

3 What is the primary effect of inflation on the value of money?

A. It increases the purchasing power of money.
B. It has no effect on the value of money.
C. It decreases the purchasing power of money.
D. It stabilizes the exchange rate.

4 Which term describes a situation where an economy experiences stagnant economic growth, high unemployment, and high inflation simultaneously?

A. Reflation
B. Stagflation
C. Deflation
D. Hyperinflation

5 Demand-pull inflation is most likely caused by which of the following?

A. An increase in the cost of raw materials.
B. A decrease in consumer spending.
C. Aggregate demand exceeding aggregate supply.
D. Technological advancements reducing production costs.

6 Cost-push inflation is typically triggered by:

A. An increase in the money supply.
B. A supply shock, such as a sudden rise in oil prices.
C. Increased government spending.
D. Lower interest rates.

7 The Phillips Curve generally suggests a trade-off between which two economic variables in the short run?

A. Inflation and Interest Rates
B. Inflation and Unemployment
C. GDP and Inflation
D. Tax rates and Government Spending

8 Which of the following groups benefits most during a period of unanticipated inflation?

A. Creditors (Lenders)
B. Debtors (Borrowers)
C. People on fixed incomes
D. Savers holding cash

9 Extremely rapid and out-of-control inflation, often exceeding 50% per month, is called:

A. Galloping inflation
B. Creeping inflation
C. Hyperinflation
D. Walking inflation

10 Which equation represents the Quantity Theory of Money, often used to explain long-term inflation?

A.
B.
C.
D.

11 What is the Consumer Price Index (CPI) designed to measure?

A. The price of all goods and services produced domestically.
B. The cost of a fixed basket of goods and services purchased by an average urban consumer.
C. The prices received by producers for their output.
D. The interest rates set by the central bank.

12 The formula to calculate the CPI for the current year is:

A.
B.
C.
D.

13 If the CPI was 200 last year and is 210 this year, what is the inflation rate?

A. 10%
B. 20%
C. 5%
D. 2.5%

14 Which of the following is a limitation of the CPI known as substitution bias?

A. It excludes imported goods.
B. Consumers substitute cheaper goods for goods whose prices have risen, which the fixed basket misses.
C. It overestimates the quality improvements of goods.
D. It only measures wholesale prices.

15 What is the primary difference between Headline Inflation and Core Inflation?

A. Headline inflation excludes food and energy; Core inflation includes them.
B. Headline inflation includes all items; Core inflation excludes volatile items like food and energy.
C. Headline inflation is measured by PPI; Core inflation is measured by CPI.
D. Headline inflation measures services; Core inflation measures goods.

16 The Producer Price Index (PPI) measures price changes from the perspective of:

A. The consumer
B. The seller/producer
C. The government
D. The importer

17 Which of the following is included in the GDP Deflator but NOT in the CPI?

A. Imported consumer goods.
B. Capital goods (machinery) produced domestically.
C. Used cars sold to consumers.
D. Consumer services like haircuts.

18 Calculate the GDP Deflator if Nominal GDP is 400 billion.

A. 80
B. 120
C. 125
D. 1.25

19 Why might the GDP Deflator be considered a broader measure of inflation than the CPI?

A. It is calculated monthly rather than quarterly.
B. It includes prices of all domestically produced goods and services, not just a consumer basket.
C. It focuses specifically on food and energy prices.
D. It includes the prices of imported goods.

20 If nominal wages increase by 4% and the inflation rate is 6%, what happens to real wages?

A. They increase by 10%.
B. They increase by 2%.
C. They decrease by 2%.
D. They remain constant.

21 Which term describes inflation resulting from a wage-price spiral?

A. Demand-pull inflation
B. Built-in inflation (Cost-push)
C. Hyperinflation
D. Deflation

22 In the context of the Quantity Theory of Money (), if Velocity () and Output () are constant, a 10% increase in Money Supply () will lead to:

A. A 10% increase in Output.
B. A 10% decrease in Price Level.
C. A 10% increase in Price Level.
D. No change in Price Level.

23 Which of the following is a fiscal policy measure to control inflation?

A. Increasing the interest rate.
B. Selling government securities in the open market.
C. Increasing direct taxes.
D. Increasing the reserve requirement ratio.

24 Which of the following is a monetary policy tool used by Central Banks to control inflation?

A. Reducing the income tax rate.
B. Increasing government expenditure on infrastructure.
C. Increasing the Repo Rate (policy interest rate).
D. Providing subsidies to farmers.

25 To combat high inflation, a Central Bank would likely engage in Open Market Operations (OMO) by:

A. Buying government securities.
B. Selling government securities.
C. Printing more currency.
D. Lowering the reserve ratio.

26 Inflation Targeting is a monetary policy framework where:

A. The government sets price ceilings for all goods.
B. The central bank commits to keeping unemployment at zero.
C. The central bank publicly announces a target inflation rate and adjusts policy to achieve it.
D. The currency is pegged to gold.

27 What is the base year typically used for in index calculations like CPI?

A. The year with the highest inflation.
B. A reference year against which costs in other years are compared.
C. The current year being measured.
D. The year the central bank was founded.

28 An increase in the Cash Reserve Ratio (CRR) helps control inflation by:

A. Increasing the lending capacity of commercial banks.
B. Reducing the lending capacity of commercial banks.
C. Increasing the fiscal deficit.
D. Directly lowering the prices of goods.

29 The Laspeyres Price Index uses which basket for weighing prices?

A. The current year's basket quantities.
B. The base year's basket quantities.
C. An average of base and current year quantities.
D. The quantity of goods produced globally.

30 The Paasche Price Index differs from Laspeyres because it uses:

A. Base year quantities as weights.
B. Current year quantities as weights.
C. Fixed prices.
D. Only services.

31 Which of the following is considered a supply-side measure to control inflation?

A. Increasing interest rates.
B. Cutting government spending.
C. Improving infrastructure to reduce transport costs and bottlenecks.
D. Increasing income tax.

32 If a country has an inflation rate of 500%, the currency loses its function primarily as a:

A. Unit of account.
B. Store of value.
C. Medium of exchange.
D. Standard of deferred payment.

33 The 'Basket of Goods' used in CPI calculations is periodically updated to:

A. Ensure inflation always looks low.
B. Reflect changes in consumer buying habits and new products.
C. Match the GDP deflator.
D. Increase the tax revenue.

34 What is imported inflation?

A. Inflation caused by high export demand.
B. Inflation transmitted from foreign countries through higher prices of imports.
C. Inflation caused by tourism.
D. Inflation restricted to import-substitute industries.

35 Which price index is most relevant for adjusting social security payments or union wages for cost of living (COLA)?

A. PPI
B. GDP Deflator
C. CPI
D. Wholesale Price Index (WPI)

36 When the government reduces its spending to control inflation, it is implementing:

A. Expansionary Fiscal Policy
B. Contractionary Fiscal Policy
C. Expansionary Monetary Policy
D. Contractionary Monetary Policy

37 The Nominal Interest Rate is 8% and the Inflation Rate is 3%. According to the Fisher Effect, the Real Interest Rate is approximately:

A. 11%
B. 5%
C. 24%
D. 2.6%

38 Inflation targeting requires the Central Bank to be:

A. Dependent on the Ministry of Finance.
B. Independent and credible.
C. Focused solely on Exchange Rates.
D. Secretive about its policies.

39 Which component typically has the highest weight in the CPI basket?

A. Apparel
B. Housing/Shelter
C. Education
D. Recreation

40 If the GDP Deflator rises from 100 to 110, it implies:

A. Real GDP has increased by 10%.
B. Nominal GDP is lower than Real GDP.
C. The average price level of domestic production has increased by 10%.
D. The CPI has definitely increased by exactly 10%.

41 Shoe-leather costs of inflation refer to:

A. The cost of changing price tags.
B. The resources wasted when people reduce their money holdings to avoid inflation tax.
C. The increase in the price of leather goods.
D. The tax distortions caused by inflation.

42 Menu costs of inflation refer to:

A. The costs incurred by firms to change their listed prices.
B. The rising cost of food in restaurants.
C. The cost of printing new currency.
D. The uncertainty in decision making.

43 Which of the following is NOT a cause of Demand-Pull Inflation?

A. Deficit financing by the government.
B. Increase in exports.
C. Hoarding of goods by traders.
D. Tax cuts increasing disposable income.

44 The Wholesale Price Index (WPI) tracks prices at which stage?

A. Retail stage
B. Bulk sale/first stage of transaction
C. After taxes are added
D. At the point of consumption

45 What is the Price Stability goal in Inflation Targeting?

A. 0% inflation.
B. A low and stable rate of inflation (e.g., 2%).
C. Negative inflation (Deflation).
D. Fixing prices of essential commodities.

46 Which measurement is best to analyze the competitiveness of a country's goods in the global market?

A. CPI
B. PPI
C. Real Exchange Rate adjusted for inflation
D. Nominal Interest Rate

47 If the government imposes price controls (ceilings) to stop inflation, what is the likely immediate result?

A. Shortages and black markets.
B. Surplus of goods.
C. Immediate resolution of inflation causes.
D. Increase in quality of goods.

48 In the calculation of CPI, calculating the cost of the basket in the current year requires:

A.
B.
C.
D.

49 Selective Credit Control is a qualitative tool of monetary policy that involves:

A. Changing the Repo Rate.
B. Restricting credit for specific purposes (e.g., speculation).
C. Printing more money.
D. Selling bonds.

50 Which of the following describes the Anchor in inflation targeting?

A. The physical gold reserve.
B. The target variable (inflation rate) that ties down inflation expectations.
C. The lowest possible interest rate.
D. The debt-to-GDP ratio.