Inflation Quiz
Questions: 16 · 10 minutes
1. Your nominal wage rises by 3% while consumer prices rise by 5%. Approximately what happens to your real wage?
It falls by about 2%
It rises by about 2%
It rises by about 8%
It remains unchanged because the wage still increased
2. A poor harvest causes coffee prices to rise sharply, while most other prices remain stable. What is the best interpretation?
It means the currency's purchasing power has fallen equally for every purchase
It proves the general price level is falling
It is automatically demand-pull inflation across the economy
It is primarily a relative-price increase, not necessarily broad inflation
3. Last year's price index jumped from 100 to 120 after a one-time shock. This year it remains at 120. What annual inflation rate is reported this year, and why?
0%, because the price level did not rise further from last year
120%, because the current index level equals 120
20%, because the original increase becomes permanent inflation
Negative 20%, because the shock is no longer new
4. Which distinction between the Consumer Price Index and the GDP deflator is generally correct?
The CPI measures only producer inputs, while the GDP deflator measures only wages
The CPI includes every domestically produced item, while the GDP deflator includes only imports
The CPI follows a consumer basket, while the GDP deflator covers domestically produced final goods and services
The two measures always use identical coverage and weights
5. A representative basket costs $200 in the base period and $210 one year later. What inflation rate does this imply for the basket?
2%
20%
10%
5%
6. How can a central bank's increase in policy interest rates help reduce inflationary pressure?
By guaranteeing that every retail price immediately falls
By directly increasing the productive capacity of factories
By raising all wages at the same rate as prices
By making borrowing less attractive and moderating overall demand
7. Unexpected inflation occurs after a fixed-rate loan is issued. Assuming no other changes, who generally benefits from repaying the loan with money that has less purchasing power?
The lender, because the nominal interest rate automatically rises
The borrower
Both parties equally, because the contract is fixed
Neither party, because inflation cannot affect existing debt
8. Which statement best defines inflation?
A sustained increase in the general price level of goods and services
An increase in the price of any single product
A decline in the total quantity of money in circulation
A period when all workers receive higher wages
9. Household spending and business investment surge while the economy is already operating near capacity. Prices begin rising broadly. Which explanation fits best?
A favorable supply shock
Debt deflation
Demand-pull inflation
Seasonal price variation
10. A savings account pays 6% nominal interest while inflation is 4%. Using the common approximation, what is the real interest rate?
About 4%
About 2%
About 6%
About 10%
11. Workers expect prices to keep rising, negotiate higher wages, and firms then raise prices partly to cover higher labor costs. What process does this illustrate?
A liquidity trap
A one-time change in a relative price
A wage-price spiral
A productivity-driven deflation cycle
12. A pension payment is fully indexed to a consumer price measure. If that index rises by 4%, what is the intended effect of increasing the payment by 4%?
To guarantee a 4% increase in real purchasing power
To eliminate every possible difference between personal and measured inflation
To broadly preserve purchasing power relative to the measured basket
To reduce the nominal value of the pension
13. An economy experiences a major adverse supply shock. Prices rise while output falls and unemployment increases. Which term best describes this combination?
Disinflation
Productivity growth
Demand-led expansion
Stagflation
14. When the price of one item in a fixed consumer basket rises, households may switch toward a cheaper alternative. If the index does not promptly reflect that behavior, what issue may arise?
It may overstate the increase in the cost of maintaining a similar standard of living
The index will exclude all consumer services
The index will become a measure of unemployment
The index will necessarily show deflation
15. A sharp rise in energy costs makes production and transportation more expensive across many industries. What type of inflationary pressure is this?
Demand-pull pressure
Cost-push pressure
Asset-price deflation
Productivity-led price decline
16. The inflation rate falls from 8% to 4%, while the overall price level continues to rise. What is this called?
Deflation
Disinflation
Stagflation
Reflation