Inflation

What is inflation?

• A decrease in the overall price level of goods and services

• An increase in the overall price level of goods and services

• A steady price level of goods and services

• A fluctuation in the price of a single commodity

Answer explanation

Correct Answer: B) An increase in the overall price level of goods and services

Explanation: Inflation refers to the overall rise in the price level of goods and services in an economy over a period of time. This means that, on average, prices are going up, which erodes purchasing power.

Which index is commonly used to measure inflation?

• Producer Price Index (PPI)

• Consumer Price Index (CPI)

• Gross Domestic Product (GDP) deflator

• Interest Rate Index (IRI)

Answer explanation

Correct Answer: B) Consumer Price Index (CPI)

Explanation: The Consumer Price Index (CPI) is the most widely used measure of inflation. It tracks changes in the price level of a basket of consumer goods and services over time, reflecting the cost of living.

What typically happens to purchasing power during inflation?

• It increases

• It fluctuates

• It remains the same

• It decreases

Answer explanation

Correct Answer: D) It decreases

Explanation: During inflation, the purchasing power of money decreases because each unit of currency buys fewer goods and services than before, effectively reducing the real value of money.

Which of the following is a common cause of inflation?

• Decrease in demand for goods

• Increase in supply of goods

• Increase in production costs

• Reduction in government spending

Answer explanation

Correct Answer: C) Increase in production costs

Explanation: Cost-push inflation occurs when the costs of production inputs (such as raw materials or wages) increase, leading producers to raise prices to maintain profit margins.

What is hyperinflation?

• Extremely high and typically accelerating inflation

• Inflation at a rate of 1-3% per year

• Inflation that occurs in a stable economy

• Inflation at a rate of 10% per year

Answer explanation

Correct Answer: A) Extremely high and typically accelerating inflation

Explanation: Hyperinflation is a situation where inflation rates exceed 50% per month. It often leads to a complete loss of confidence in a currency and severe economic instability.

How can central banks combat high inflation?

• By decreasing interest rates

• By increasing interest rates

• By printing more money

• By reducing taxes

Answer explanation

Correct Answer: B) By increasing interest rates

Explanation: Central banks can reduce inflation by increasing interest rates, which makes borrowing more expensive and saving more attractive, thereby reducing consumer spending and slowing down inflation.

Which term describes inflation that is caused by an increase in consumer demand?

• Stagflation

• Built-in inflation

• Demand-pull inflation

• Cost-push inflation

Answer explanation

Correct Answer: C) Demand-pull inflation

Explanation: Demand-pull inflation occurs when aggregate demand in an economy outpaces aggregate supply, leading to higher prices as consumers compete for limited goods and services.

What is cost-push inflation?

• Inflation caused by increased consumer demand

• Inflation resulting from increased production costs

• Inflation due to increased government spending

• Inflation from foreign exchange rate changes

Answer explanation

Correct Answer: B) Inflation resulting from increased production costs

Explanation: Cost-push inflation arises when production costs increase (e.g., due to higher wages or raw material prices), causing businesses to pass on those costs to consumers in the form of higher prices.

What effect can moderate inflation have on an economy?

• It can stimulate economic growth

• It can lead to economic stagnation

• It has no impact on the economy

• It can cause deflation

Answer explanation

Correct Answer: A) It can stimulate economic growth

Explanation: Moderate inflation can be a sign of a growing economy, as it often accompanies increased consumer spending and investment. It encourages spending and investing rather than hoarding money.

What is the relationship between inflation and interest rates typically described as?

• Directly proportional

• Unrelated

• Cyclical

• Inversely proportional

Answer explanation

Correct Answer: D) Inversely proportional

Explanation: Inflation and interest rates are typically inversely related. When inflation is high, central banks may raise interest rates to cool down the economy, whereas lower inflation may lead to lower interest rates to stimulate borrowing and spending.