Inflation: Causes, Effects, and Measurement

Question 1

Assess the effectiveness of demand-side and supply-side policies in controlling inflation. Consider how the underlying causes of inflation influence the success or failure of these policies.

Accepted Answer

Supply-side policies are more effective when inflation is mainly caused by cost-push factors.

Accepted Answer

Demand-side policies are more effective when inflation is mainly caused by demand-pull factors.

Answer

Demand-side policies are always more effective than supply-side policies in controlling inflation.

Answer

The underlying causes of inflation are irrelevant to the effectiveness of inflation control policies.

Question 2

Which of the following is not a measure of inflation used by economists?

Accepted Answer

Gross National Product (GNP)

Answer

Consumer Price Index (CPI)

Answer

Producer Price Index (PPI)

Answer

Retail Price Index (RPI)

Question 3

What is the primary factor contributing to demand-pull inflation?

Accepted Answer

A rapid increase in aggregate demand

Answer

A sudden decrease in aggregate supply

Answer

Persistent cost-push pressures

Answer

Government intervention in the economy

Question 4

How does the term 'deflation' differ from the term 'disinflation'?

Accepted Answer

Deflation refers to a general decrease in prices, whereas disinflation indicates a slowdown in the rate of price increases.

Answer

Deflation is a temporary drop in prices, while disinflation represents a more extended period of price decline.

Answer

Deflation is always harmful to an economy, whereas disinflation can be beneficial.

Answer

There is no meaningful distinction between deflation and disinflation.

Question 5

Which type of inflation is characterized by a rapid rise in prices over a short period?

Accepted Answer

Hyperinflation

Answer

Creeping inflation

Answer

Stagflation

Answer

Deflation

Question 6

What is the purpose of the Taylor Rule?

Accepted Answer

It guides central bank decisions based on inflation and output.

Answer

It explains the causes of inflation.

Answer

It calculates the real interest rate.

Answer

It stimulates economic growth through fiscal policy.

Question 7

Analyze how inflation can simultaneously stimulate and hinder economic growth. Provide specific examples to illustrate these contrasting effects.

Accepted Answer

Inflation can stimulate growth by boosting consumer spending, but it can also hinder growth by eroding the value of savings.

Answer

Inflation always stimulates economic growth by increasing overall demand.

Answer

Inflation only hinders economic growth by reducing the value of savings.

Answer

Inflation has no impact on economic growth.

Question 8

Which factor is NOT a cause of inflation?

Accepted Answer

Increased supply

Answer

Increased demand

Answer

Decreased interest rates

Answer

Wage increases

Question 9

What is the primary role of the central bank in controlling inflation?

Accepted Answer

Managing the money supply

Answer

Setting interest rates

Answer

Influencing government spending

Answer

Fixing prices

Question 10

Which type of inflation arises from an increase in overall demand?

Accepted Answer

Demand-pull inflation

Answer

Cost-push inflation

Answer

Built-in inflation

Answer

Structural inflation

Question 11

What is the main objective of an inflation target?

Accepted Answer

To control the level of inflation

Answer

To reduce unemployment

Answer

To promote economic growth

Answer

To balance the budget

Question 12

Which is NOT a potential consequence of deflation?

Accepted Answer

Increased consumer spending

Answer

Reduced investment

Answer

Increased unemployment

Answer

Lower real interest rates

Question 13

How does inflation impact the value of bonds?

Accepted Answer

Diminishes their value

Answer

Enhances their value

Answer

Has no impact on their value

Answer

The impact varies based on the type of bond

Question 14

Which of the following is NOT a measure of inflation?

Accepted Answer

Gross Domestic Product (GDP)

Answer

Consumer Price Index (CPI)

Answer

Producer Price Index (PPI)

Answer

Retail Price Index (RPI)

Question 15

Which tool is commonly employed by central banks to manage inflation?

Accepted Answer

Adjusting interest rates

Answer

Altering government spending

Answer

Expanding the money supply

Answer

Devaluing the currency

Question 16

Explain the key difference between CPI and RPI:

Accepted Answer

CPI includes housing costs, whereas RPI excludes them.

Answer

CPI measures the cost of living for all households, while RPI focuses on low-income households.

Answer

CPI is a measure of inflation in the UK, and RPI is used in the Eurozone.

Answer

There is no meaningful difference between CPI and RPI.

Question 17

Which of the following is NOT a widely used indicator for measuring inflation?

Accepted Answer

Unemployment rate

Answer

GDP deflator

Answer

Consumer sentiment index

Answer

Producer price index

Question 18

Which of the following factors does NOT contribute to inflation, a sustained increase in the general price level of goods and services?

Accepted Answer

Increased efficiency in production processes

Answer

Increased demand for goods and services

Answer

Reduced supply of goods and services

Answer

Higher production costs, such as raw material prices

Question 19

Which measure of inflation considers a wide range of goods and services purchased by households to assess the change in cost of living?

Accepted Answer

Consumer Price Index (CPI)

Answer

Wholesale Price Index (WPI)

Answer

Retail Price Index (RPI)

Answer

Producer Price Index (PPI)

Question 20

What is the term used to describe the situation when demand exceeds supply in a specific sector of the economy, leading to price increases in that sector?

Accepted Answer

Demand-pull inflation

Answer

Cost-push inflation

Answer

Imported inflation

Answer

Underlying inflation

Question 21

What is the primary tool employed by central banks to regulate and manage inflation?

Accepted Answer

Monetary policy

Answer

Fiscal policy

Answer

Trade policy

Answer

Industrial policy

Question 22

What is the relationship between inflation and interest rates, as typically managed by central banks?

Accepted Answer

They are positively correlated, implying that as inflation rises, interest rates also tend to rise.

Answer

They are negatively correlated, meaning that as inflation increases, interest rates usually decrease.

Answer

There is no clear relationship between them.

Answer

They are inversely correlated only during periods of extremely high inflation.

Question 23

What term is used to describe a period of excessively high and persistent inflation?

Accepted Answer

Hyperinflation

Answer

Stagflation

Answer

Deflation

Answer

Disinflation

Question 24

Which monetary policy tool is used by central banks to reduce inflation?

Accepted Answer

Quantitative Tightening

Answer

Quantitative Easing

Answer

Fiscal Policy

Question 25

What is wage-push inflation? How does it happen, and what are its potential effects on the economy?

Accepted Answer

Wage-push inflation happens when businesses raise wages to attract and keep workers, which increases their production costs.

Answer

Wage-push inflation happens when consumers want more goods and services than businesses can provide.

Question 26

How does inflation disproportionately impact different income groups?

Accepted Answer

It diminishes the purchasing power of low-income earners more severely than high-income earners.

Answer

It favors low-income earners by boosting their purchasing power.

Answer

It aids savers by increasing the real value of their savings.

Answer

It has no differential impact on income groups.

Question 27

Structural reforms, like increasing labor market flexibility, aim to address which underlying causes of inflation?

Accepted Answer

Supply-side constraints

Answer

High aggregate demand

Answer

Cost-push factors

Question 28

What is the primary tool employed by the Bank of England to control inflation?

Accepted Answer

Monetary policy

Answer

Fiscal policy

Answer

Supply-side policies

Answer

Wage controls

Question 29

What is the primary objective of supply-side policies?

Accepted Answer

To increase the supply of goods and services

Answer

To decrease the demand for goods and services

Answer

To control the money supply

Answer

To reduce unemployment

Question 30

Which of the following is an example of a supply-side policy?

Accepted Answer

Cutting taxes on businesses

Answer

Increasing government spending

Answer

Raising interest rates

Answer

Reducing the minimum wage

Question 31

Which of the following is not a commonly used measure of inflation?

Accepted Answer

Gross Domestic Product (GDP)

Answer

Consumer Price Index (CPI)

Answer

Retail Price Index (RPI)

Answer

Producer Price Index (PPI)

Question 32

What is the primary cause of demand-pull inflation?

Accepted Answer

Increase in government spending and/or private investment

Answer

Decrease in interest rates

Answer

Increase in productivity

Answer

Decrease in aggregate demand

Question 33

Which of the following is NOT a potential consequence of inflation?

Accepted Answer

Increased investment opportunities

Answer

Reduced purchasing power

Answer

Unstable economic growth

Answer

Lower unemployment

Question 34

Which of the following is NOT a potential benefit of maintaining a low and stable inflation rate?

Accepted Answer

Boosts profits for businesses

Answer

Promotes stable economic growth

Answer

Reduces uncertainty for businesses and consumers

Answer

Encourages increased consumer spending

Question 35

What is the key difference between core inflation and headline inflation?

Accepted Answer

Core inflation excludes volatile items like food and energy, while headline inflation includes them.

Answer

Headline inflation excludes volatile items like food and energy, while core inflation includes them.

Answer

Core inflation is measured over a longer time period than headline inflation.

Answer

There is no difference between core and headline inflation.

Question 36

What is the Phillips Curve primarily used to illustrate?

Accepted Answer

The inverse relationship between inflation and unemployment

Answer

The direct relationship between inflation and economic growth

Answer

The impact of monetary policy on inflation

Answer

The relationship between inflation and interest rates

Question 37

Which type of inflation is characterized by extremely rapid price increases?

Accepted Answer

Hyperinflation

Answer

Creeping inflation

Answer

Walking inflation

Answer

Galloping inflation

Question 38

What is the primary purpose of using indexation in an economy?

Accepted Answer

To adjust wages, benefits, and other payments for inflation

Answer

To increase the overall inflation rate

Answer

To reduce the cost of living

Answer

To stimulate economic growth

Question 39

Define inflation.

Accepted Answer

A sustained increase in the general price level of goods and services over time.

Answer

An increase in the value of money over time.

Answer

A decrease in the number of goods and services available.

Question 40

Identify the primary cause of inflation.

Accepted Answer

An increase in the money supply relative to the supply of goods and services.

Answer

Higher consumer spending.

Answer

Increased government borrowing.

Question 41

Which of the following is NOT an effect of inflation?

Accepted Answer

Increased economic growth.

Answer

Increased cost of living.

Answer

Eroded savings.

Answer

Reduced purchasing power.

Question 42

Distinguish between demand-pull and cost-push inflation.

Accepted Answer

Demand-pull inflation is caused by increased demand, while cost-push inflation results from increased production costs.

Answer

Demand-pull inflation is caused by decreased supply, while cost-push inflation results from increased demand.

Question 43

How does inflation affect consumers?

Accepted Answer

Reduces purchasing power and increases the cost of living.

Answer

Increases investment and savings.

Answer

Improves economic well-being.

Question 44

What are the consequences of high inflation for businesses?

Accepted Answer

Increased costs and reduced profitability.

Answer

Enhanced competitiveness and productivity.

Answer

Lower production costs and increased efficiency.

Question 45

Identify the potential risks associated with high inflation.

Accepted Answer

Diminished purchasing power, economic uncertainty, and social unrest.

Answer

Increased employment and economic prosperity.

Answer

Enhanced investment and innovation.

Question 46

Which of the following is a key factor that can lead to inflation?

Accepted Answer

Increase in the money supply

Answer

Decline in consumer confidence, leading to a decrease in spending

Answer

Government policies that reduce taxes, stimulating economic growth

Answer

Technological advancements that result in lower production costs

Question 47

Which type of inflation occurs when there is a substantial increase in production costs, such as raw materials or labor?

Accepted Answer

Cost-push inflation

Answer

Deflation

Answer

Hyperinflation

Answer

Demand-pull inflation

Question 48

What is the most widely used measure of inflation in the United Kingdom?

Accepted Answer

Consumer Price Index (CPI)

Answer

GDP Deflator

Answer

Retail Price Index (RPI)

Answer

Wholesale Price Index (WPI)

Question 49

Which of the following is a negative consequence of persistent inflation?

Accepted Answer

Reduced purchasing power of money

Answer

Improved economic growth

Answer

Increased investments

Answer

Lower unemployment rates

Question 50

What is the primary objective of the Bank of England's monetary policy with respect to inflation?

Accepted Answer

Maintain price stability

Answer

Promote economic growth

Answer

Reduce government debt

Answer

Control unemployment

Question 51

Which of the following is a potential long-term impact of persistent inflation?

Accepted Answer

Erosion of savings' value

Answer

Stimulated economic growth

Answer

Increased job creation

Question 52

What is the primary responsibility of a central bank regarding inflation?

Accepted Answer

Control and manage inflation to maintain price stability

Answer

Regulate the stock market

Answer

Allocate government funds

Answer

Ensure full employment

Question 53

Which of the following factors does NOT contribute to demand-pull inflation?

Accepted Answer

Increase in productivity

Answer

Increase in government spending

Answer

Rising consumer demand

Answer

Expansionary monetary policy