Understanding Inflation and Interest Rates

Which of the following scenarios best illustrates how the Consumer Price Index (CPI) affects real income?

• A family increases savings after receiving a raise

• A worker earns more money while prices rise faster

• The government increases taxes

• A student receives a scholarship

• The central bank raises interest rates

If the CPI rises by 5% and a worker’s nominal wage increases by 3%, what is the effect on their real wage?

• Real wage increases by 8%

• Real wage remains the same

• Real wage decreases by 2%

• Real wage increases by 2%

• Real wage decreases by 8%

Why might CPI overstate the actual cost of living?

• It excludes energy prices

• It includes only luxury goods

• It doesn’t adjust well for substitution between goods

• It ignores import prices

• It counts wages twice

Which change in CPI would most likely cause the central bank to raise interest rates?

• CPI falls by 1%

• CPI remains constant

• CPI rises rapidly due to energy prices

• CPI drops due to technology prices

• CPI includes deflation in food

A country’s CPI basket includes goods that are no longer popular or widely used. What issue does this illustrate?

• Quality bias

• Substitution bias

• Basket bias

• Income bias

• Time lag error

Demand-pull inflation is most likely to occur when:

• The government lowers interest rates during recession

• Aggregate demand exceeds aggregate supply

• Oil prices remain stable

• Wages decrease steadily

• Exports fall sharply

Which of the following situations best demonstrates cost-push inflation?

• Central bank prints more money

• Consumer demand rises during holidays

• Labor unions negotiate higher wages, increasing production costs

• Imports increase drastically

• Stock market surges

Stagflation is a unique form of inflation because it combines:

• Low inflation and high employment

• High inflation and high unemployment

• Inflation with trade surplus

• Deflation with budget surplus

• Rising GDP and falling prices

Which policy is most effective in combating demand-pull inflation?

• Increasing subsidies

• Lowering taxes

• Raising interest rates

• Printing more money

• Increasing public sector salaries

An example of hyperinflation is:

• 5% price rise per year

• Prices doubling every year

• Prices rising 1,000% in a month

• Gradual increase in fuel costs

• Currency appreciation due to trade surplus