Question 1

Demand-pull inflation occurs when:&#10;A) Aggregate supply is equal to aggregate demand.&#10;B) Aggregate demand is equal to output.&#10;C) Aggregate supply is greater than aggregate demand.&#10;D) Aggregate demand is greater than aggregate supply.

Accepted Answer

Demand-pull inflation is characterized by a situation where aggregate demand in an economy outpaces aggregate supply, leading to higher prices.

Question 2

Cost-push inflation might be caused by:&#10;A) An income tax cut&#10;B) Lower interest rates&#10;C) More government spending&#10;D) An increase in energy prices

Accepted Answer

Cost-push inflation occurs when the overall price level rises due to increases in the cost of wages and raw materials, such as energy prices.

Question 3

Which of the following is not a problem of inflation?&#10;A) Fiscal drag&#10;B) Menu costs&#10;C) Show leather costs&#10;D) CPI

Accepted Answer

CPI, or Consumer Price Index, is not a problem of inflation but rather a measure used to track the rate of inflation by comparing the price of a standard set of goods and services over time. Fiscal drag, menu costs, and shoe leather costs are all considered problems or consequences of inflation.

Question 4

An increase in the money supply is likely to lead to:&#10;A) A lower interest rate&#10;B) An outward shift in the demand for money&#10;C) An inward shift in the demand for money&#10;D) A decrease in consumption

Accepted Answer

An increase in the money supply typically leads to lower interest rates because there is more money available for borrowing. Lower interest rates make borrowing cheaper, encouraging spending and investment.

Question 5

The Phillips curve shows the relationship between:&#10;A) Money supply and inflation&#10;B) Inflation and unemployment&#10;C) Inflation and aggregate demand&#10;D) Money supply and money demand

Accepted Answer

The Phillips curve illustrates the inverse relationship between inflation and unemployment, suggesting that as inflation increases, unemployment tends to decrease, and vice versa.

Question 6

According to the Phillips curve:&#10;A) There is no short run trade-off between the two variables.&#10;B) There is no long-term trade-off between the two variables.&#10;C) Inflation is due to government actions.&#10;D) The economy is always in long run equilibrium.

Accepted Answer

The Phillips curve suggests that there is a short-run trade-off between inflation and unemployment, but in the long run, this trade-off does not exist, implying that efforts to reduce unemployment below its natural rate with monetary policy will only lead to higher inflation without reducing unemployment in the long term.

Question 7

When inflation is 2%:&#10;A) All prices in an economy are growing by 2%.&#10;B) The economy is growing by 2%.&#10;C) Most incomes are falling by 2%.&#10;D) The weighted average of prices is growing by 2%.

Accepted Answer

Inflation measures the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. It is represented as a percentage increase or decrease in prices over time. A 2% inflation rate means that, on average, prices are 2% higher than they were in the previous period. This is typically calculated as a weighted average to account for the different spending patterns of consumers, making option D correct. Options A, B, and C misunderstand the concept of inflation, its measurement, or its implications.

Question 8

Inflation means all prices are increasing.

Accepted Answer

Inflation refers to the general increase in prices across the economy, but not all prices must increase simultaneously or at the same rate. Some prices may even decrease.

Question 9

In the liquidity trap an increase in the money supply leads to an increase in the interest rate.

Accepted Answer

In a liquidity trap, interest rates are already low, and an increase in the money supply does not lead to an increase in interest rates but rather has little to no effect on them, as people prefer to hold onto cash or safe assets rather than borrowing or investing.

Question 10

If prices in general are falling this is called _________.

Accepted Answer

The answer of If prices in general are falling this...

Question 11

The inflation target in the UK for the Monetary Policy Committee is&#10;A) 2%&#10;B) 3%&#10;C) 0%&#10;D) -1%

Accepted Answer

The answer of The inflation target in the UK for...

Question 12

Which of the following is an example of deflation?&#10;A) Prices growing at 2%.&#10;B) Prices were growing at 3% last year and 2% this year.&#10;C) Prices are growing at 0%.&#10;D) Prices are falling.

Accepted Answer

The answer of Which of the following is an example...

Question 13

Inflation in the UK is generally measured using the:&#10;A) MPI&#10;B) CPI&#10;C) RPX&#10;D) None of the above

Accepted Answer

The answer of Inflation in the UK is generally measured...

Question 14

The formula for calculating inflation is:&#10;A) (Prices t-1 + Prices t) *100/Prices t&#10;B) (Prices t - Prices t-1) *100/Prices t-1&#10;C) (Prices t-1 - Prices t) *100/Prices t-1&#10;D) (Prices t + Prices t-1) *100/Prices t

Accepted Answer

The answer of The formula for calculating inflation is:&#10;A) (Prices...

Question 15

Which of the following categories is included in the RPI measure of inflation but not the CPI?&#10;A) Council tax&#10;B) Transport costs&#10;C) Recreation and culture&#10;D) Restaurants and hotels

Accepted Answer

The answer of Which of the following categories is included...

Deck 28: Government Objectives: Managing Inflation