Chapter 4: Inflation
MULTIPLE CHOICE. Choose the one alternative that best
completes the statement
1. High inflation levels in the economy leads to _______ in the supply of
money.
a. Increase
b. Decrease
c. No change
d. None of the above
2. Which of the following concepts is the opposite of inflation?
a. Deflation
b. Stagflation
c. Recession
d. None of the above
3. When the price levels of goods and services are falling continuously, this
phenomenon is called _________.
a. Deflation
b. Stagflation
c. Inflation
d. None of the above
4. Money supply increases when inflation in the economy _____
a. No change
b. Decrease
c. Increase
d. None of the these
.
5. Which one of the following principles is the exact reverse of inflation?
a. Recession
b. Stagflation
c. Deflation
d. None of the above
6. If the CPI was 132.5 at the end of 2003 and 140.2 at the end of 2004,
what is the inflation rate over these 2 years?
a. 7.7%
b. 5.4%
c. 4.4%
d. 5.8%
7. If the CPI is 120 in 2005 and 150 in 2006, what is the rate of inflation
over this period?
a.25%
b.2.5%
c.52%
d.5.5%
8. Suppose the economy's consumer price index (CPI) in 2008 was 188 and
the CPI in 2009 was 202. the inflation rate over the period from 2008-
2009
a. 6.4%
b. 9.5%
c. 7.4%
d. 8.9%
9. If the consumer price index (CPI) in Year 1 was 200 and the CPI in
Year 2 was 215, the rate of inflation is _____.
a. 215%
b. 15%
c. 5%
d. 7.5%
[Link] the end of last year, the consumer price index (CPI) was equal to
157.5. At the end of this year, it was equal to 163.8. the inflation rate
over this time period
a. 5%
b. 6%
c. 4%
d. 3%
2013 2012
Price Price Quantity Item
$7.50 $5.00 4 Movie tickets
$3.00 $3.00 2 Bags of popcorn
$1.50 $1.00 4 Drinks of soda
11) The information in the table above gives the 2012 reference base
period CPI basket and prices used to construct the CPI for a small
nation. It also has the 2013 prices. What is the value of the inflation
rate?
A) 40% B) 10 % C) 75% D) 13%
12) An increase in the price level is defined as
A) an expansion. B) a recession. C) inflation. D) a growth
boom.
13) The cost of inflation to society includes
A) higher interest rates paid by the government on its debt.
B) unpredictable changes in the value of money.
C) higher interest rates paid by borrowers.
D) the lost spending when people do not have enough money.
14) Hyperinflation is defined as
A) very high inflation rates. B) very low inflation rates.
C) declining inflation rates. D) rising but low inflation rates.
15) Suppose the CPI last year is 121 and the CPI this year is 137.
The correct method to calculate the inflation rate is
A) 137 × 121 = 258. B) (137/121) × 100 = 113.2.
C) [(137 - 121)/121] × 100 = 13.2. D) (137 - 121)/100 = 0.16.
16) Suppose the consumer price index this year is 150 and the
consumer price index last year was 125. The inflation rate between
last year and this year was
A) 16.6 percent. B) 20 percent. C) 1.6 percent. D) 2 percent.
CPI Year
91 2008
100 2009
110 2010
121 2011
17) In the above table, the inflation rate between 2009 and 2010 is
approximately
A) 9 percent. B) 110 percent. C) 100 percent. D) 10 percent.
18)If too much money is chasing too few goods, the resulting
inflation is known as __________.
A. Stagflation
B. Cost-push inflation
C. Demand-pull inflation
D. None of the above
19)Inflation is measured by _______.
A. Consumer price index
B. Wholesale price index
C. Marshall’s index
D. None of the above
20)When inflation is a result of an increase in the price of factors of
production, the result is ________.
A. Stagflation
B. Cost-push inflation
C. Demand-pull inflation
D. None of the above
21)The Consumer Price Index helps to measure the degree to which
___________.
A. Consumer prices have risen relative to the wage level in the
economy
B. Distribution of income between two different sets of income
recipients at the same point in time
C. Distribution of income between two different sets of income
recipients during different periods
D. None of the above
22)The inflation which occurs resulting ricing price of import called
-------------
A. Hyper inflation
B. Core inflation.
C. Imported inflation.
D. Cost-push inflation
23) When the consumer want to buy a good but he can`t find this
goods because the shortage in supply that is leading to ------------
A. Hyper inflation
B. Core inflation
C. Cost-push inflation
D. Demand pull inflation
24) When the government control inflation by increase of income
tax that is called ---------
A. Monetary policy
B. Fiscal policy
C. Trade policy
D. Non of the above
25)The inflation which happens workers request higher wages is
called----------
A. Hyper inflation
B. Core inflation
C. Cost-push inflation
D. Built-in inflation
Answer about the following questions:
1- Mention the types of inflation.
1-Demand Pull Inflation: When aggregate demand increases and exceeds
aggregate supply.
Example: Consumers want to buy milk, but farmers don’t have enough
supply, so the price of milk goes up.
2-Cost- Push Inflation Cost-push inflation happens when it becomes more
expensive to produce goods and services, causing the prices for those
goods and services also to increase.
Example: The tools and/or materials necessary to produce milk increased in
price, causing the milk price to increase as well.
3-Built-in inflation
Built-in inflation happens when workers request higher wages to keep up
with living costs as the prices of goods and services increase. Many
businesses may increase their employees’ salaries to appease workers and
avoid a labor shortage.
These businesses typically pay themselves back by charging customers
more, contributing to rising prices of goods and services.
Example: Farmhands request higher pay to keep up with inflation, so the
farmer increases the milk prices to compensate.
4- Imported Inflation: In countries which depend on imports extensively,
inflation in exporting countries will automatically be reflected in the
domestic prices of imports.
2- What is the meaning of Hyperinflation.
When the inflation rate exceeds 1000% a year.
3- Mention the effects of inflation on the economy.
1- Reduce the purchasing power.
2- Inequality in income distribution.
3- Disturbs the planning process.
4- Increase speculative investment.
5- Negative impact on capital investment.
6- Depreciation of pounds.
7- Rise on the price of exports.
4- describe the methods to control inflation.
Inflation is generally controlled by the Central Bank and/or the government.
The main policy used is monetary policy (changing interest rates). However, in
theory, there are a variety of tools to control inflation including:
[Link] policy – Higher interest rates reduce demand in the economy,
leading to lower economic growth and lower inflation.
[Link] of money supply – Monetarists argue there is a close link between
the money supply and inflation, therefore controlling money supply can
control inflation.
3. Supply-side policies – policies to increase the competitiveness and
efficiency of the economy, putting downward pressure on long-term costs.
4. Fiscal policy – a higher rate of income tax could reduce spending, demand
and inflationary pressures.
5. Wage/price controls – trying to control wages and prices could, in theory,
help to reduce inflationary pressures. However, they are rarely used because
they are not usually effective.
