Understanding Economics 260 19 - Inflation

MULTIPLE CHOICE QUESTIONS

J/02/1/29
1 Assuming the demand for oil is price-inelastic, what will be the effect on demand-pull
inflation and on cost-push inflation in an oil importing country of an increase in the world
price of oil?
effect on demand-pull inflation effect on cost-push inflation
(A) increase increase
(B) increase reduce
(C) reduce increase
(D) reduce reduce

N/02/1/30
2 The diagram shows the annual rate of inflation in the UK between 1990 and 1993.

Which statement is true of the period 1990 to 1993?

(A) The cost of living fell. (B) The price level rose.
(C) The retail price index fell. (D) The value of money rose.

J/03/1/25
3 Which factor will cause cost-push inflation?

(A) a higher level of consumption

(B) an increase in trade union power
(C) an increase in labour productivity
(D) an appreciation of the exchange rate

J/03/1/26
4 In what circumstances will money lose its value?

(A) The economy experiences a period of deflation.

(B) The general level of prices is falling.
(C) The rate of inflation is positive.
(D) The growth of money supply falls below the growth of output.
Understanding Economics 261 19 - Inflation

J/04/1/25
5 A non-interest bearing asset is index-linked.
During a period of inflation, how will its money value and its real value change?
Money value real value
(A) rises rises
(B) rises stays constant
(C) stays constant falls
(D) stays constant stays constant

J/04/1/26
6 When will a reduction in unemployment result in an increase in inflation?
(A) when a high percentage of the increase in income is saved
(B) when the economy reaches its production possibility curve
(C) when the jobs created are unskilled
(D) when the newly employed buy mainly imported goods

J/05/1/25
7 The diagram shows the annual rate of inflation in a country between 2000 and 2003.

Which statement is true of the period 2000 to 2003?

(A) The cost of living fell. (B) The price level rose.
(C) The retail price index fell. (D) The value of money rose.

J/05/1/26
8 Which combination of events is most likely to cause inflation?

exchange rate direct taxes money supply

(A) falling falling falling
(B) falling falling rising
(C) rising rising rising
(D) rising rising falling
Understanding Economics 262 19 - Inflation

N/05/1/26
9 A government announces that it has achieved its target of 2.5% inflation per annum
and that it expects to maintain it.
How might such an announcement reduce inflationary pressure?
(A) by encouraging the government to reduce its spending
(B) by putting downward pressure on the country’s exchange rate
(C) by putting pressure on the central bank to reduce interest rates
(D) by reducing workers’ expectations of future inflation
J/06/1/25
10 What is most likely to cause demand-pull inflation?
(A) an increase in indirect taxes (B) an increase in interest rates
(C) a reduction in direct taxes (D) a reduction in the money supply

N/06/1/26
11 What is not a possible cause of cost-push inflation?
(A) an increase in firms’ profit margins
(B) an increase in the supply of money
(C) an increase in trade union power
(D) an increase in world oil prices

J/07/1/25
12 Which combination is likely to result from demand-pull inflation?
balance of trade Profits
(A) worsening Rising
(B) improving Rising
(C) worsening Falling
(D) improving Falling

J/07/1/26
13 What would be likely to increase inflation in an economy?
(A) an increase in consumer saving (B) an increase in interest rates
(C) an increase in labour productivity (D) an increase in taxes on imports

N/07/1/26
14 What would be likely to decrease inflation in an economy?
(A) an increase in consumer spending (B) an increase in employment
(C) an increase in labour productivity (D) an increase in taxes on imports

J/08/1/24
15 A country’s Consumer Price Index increased from 100 to 200 over a five-year period.
What can be deduced from this?
(A) The economy experienced creeping inflation.
(B) The standard of living halved.
(C) The cost of living fell by 50 %.
(D) The purchasing power of money halved.
Understanding Economics 263 19 - Inflation

J/08/1/25
16 Before 1999 the Brazilian government did not have a desired target rate of inflation. From
1999 it set target rates within an upper and lower boundary.
The diagram shows the rate of inflation between 1994 and 2003 and the target rate
between 1999 and 2003.

What can be concluded from the diagram?

(A) The Brazilian government achieved its target in each year from 1999 to 2003.
(B) The inflation target was continuously reduced.
(C) The lowest level of inflation was achieved when an inflation target was used.
(D) The inflation rate was more stable after inflation targets were introduced.

N/08/1/25
17 What is correct about the causes of inflation?
(A) Cost-push inflation can be caused by a rising exchange rate.
(B) Cost-push inflation can be caused by lower indirect taxes.
(C) Demand-pull inflation can be caused by a rising exchange rate.
(D) Demand-pull inflation can be caused by lower direct taxes.
J/09/1/25
18 The diagram shows the annual rate of inflation in a country between 2000 and 2003.

Which statement is true of the period 2000 to 2003?

(A) The cost of living fell. (B) The price level rose.
(C) The Retail Prices Index fell. (D) The value of money rose.
Understanding Economics 264 19 - Inflation

N/09/1/23
19 What may cause cost-push inflation?
(A) an appreciation of the exchange rate (B) a higher level of consumption
(C) an increase in labour productivity (D) an increase in trade union power
N/09/1/24
20 The graphs show consumer prices and employment for Ireland.

What can be concluded from the graphs?

(A) Between 2003 and 2004, unemployment and prices moved in the same direction.
(B) Prices were at their lowest in 2004.
(C) Prices rose continuously over the period.
(D) The number of unemployed workers fell over the period.
J/10/1/24
21 Which statement about inflation is correct?
(A) Cost-push inflation is likely to occur when the government increases its
expenditure.
(B) Demand-pull inflation is likely to occur when the country’s exchange rate
appreciates.
(C) The quantity Theory of Money predicts that changes in money supply can cause
inflation.
(D) When inflation is unanticipated real values remain unchanged.
Understanding Economics 265 19 - Inflation

J/10/1/25
22 The table shows a country’s rate of inflation for four years.
year rate of inflation %
2005 4.0
2006 3.0
2007 2.5
2008 2.0
What fell between 2005 and 2008?
(A) average prices (B) the cost of living
(C) the exchange rate (D) the value of money

N/10/1/24
23 The table shows the percentage price changes in some items in the UK Consumer Price
Index (CPI) in the year to 1 June 2006.

item % change in price

rents, electricity and 9.0
gas 4.7
education 4.0
transport 3.2
restaurants and hotels 2.9
health services

The increase in the overall CPI over the same period was 2.5 %.
What can be concluded from the data above?

A The CPI is not an accurate measure of inflation.

B Some prices must have fallen.
C The average price increase of other items was less than 2.5 %.
D The real value of money rose by more than 2.5

N/10/1/25
24 In Year 1 the price of a barrel of oil increased from $60 to $110.
In Year 2 there was a further increase to $115 a barrel.
Assume that oil price changes have an immediate impact on the general level of prices.
What will be the effect of the changes in the oil price on a country’s Consumer Price
Index and on its inflation rate in Year 2 compared with Year1?

effect on the effect on the

Consumer Price Index rate of inflation
A decrease decrease
B decrease increase
C increase decrease
D increase increase
Understanding Economics 266 19 - Inflation

J/11/1/23
25 The diagram compares the inflation rates of Paraguay and Argentina between 1950 and
2005.

What can be concluded about inflation rates in the two countries in the period 1950 to
2005?
(A) Argentina’s prices fell rapidly between 1992 and 1995.
(B) Argentina stabilised its price level between 1973 and 1992.
(C) Paraguay was always more successful than Argentina at controlling its inflation rate.
(D) Paraguay was most successful at controlling its inflation rate between 1962 and 1970.
J/11/1/24
26 Over a period of a year, the annual rate of inflation falls from 10 % to 6 %.
Which statement is correct?
(A) The cost of living has increased.
(B) The purchasing power of money has increased.
(C) There has been a reduction in the Retail Price Index.
(D) The standard of living has increased.
N/11/1/25
27 At the start of 2009, a worker earned $100 a week. In 2009, the Retail Price Index (RPI)
rose 4 % and his average wage rose 7 %. In 2010, the RPI fell 3 % and his wage fell 2 %.
What happened to his real wage between the start of 2009 and the end of 2010?
(A) It fell by less than 5 %. (B) It fell by more than 5 %.
(C) It rose by less than 5 %. (D) It rose by more than 5 %.
J/12/1/24
28 The figures show the Consumer Price Index (CPI) of a country. (1990 = 100)
CPI
2007 200
2008 204
2009 206
2010 209
What can be deduced from the data?
A There was hyperinflation between 1990 and 2007.
B The rate of inflation rose in 2009.
C The rate of inflation in 2008 was 4 %.
D The country experienced inflation in each year from 2008 to 2010.
Understanding Economics 267 19 - Inflation

J/12/1/25
29 A country experienced a significant fall in unemployment but its inflation rate remained
low.
What could explain this?
A Global competition prevented firms passing on higher costs.
B Increased spending on imports had lowered the exchange rate.
C There was a low level of spare capacity in the economy.
D Wage rates had increased by more than labour productivity.

N/12/1/23
30 The table gives some information on inflation rates, unemployment rates, and changes in
wages for a number of countries in 2006.
annual
country inflation rate unemployment change in
% rate % wages
%
Britain +1.9 +5.0 +3.5
Germany +2.1 +11.3 +0.8
Italy +2.1 +7.5 +2.3
Japan +0.5 +4.5 –0.6
Spain +4.0 +8.4 +2.5
What can be concluded from the table about 2006?
A Britain had an increase in real incomes.
B High wage rises caused high rates of inflation.
C The price of an identical product was the same in Germany and Italy.
D There were more people unemployed in Spain than in Japan.

N/12/1/25
31 The data given below refers to money supply and prices in the years 2006 and 2010 in
four countries.
Between 2006 and 2010, in which country was the rate of inflation the highest?
2006 2010
Country money supply price index money supply price index
($ million) (2005 = 100) ($ million) (2005 = 100)
A 69 104 78 153
B 65 112 120 247
C 70 101 213 157
D 172 105 360 210

N/12/1/26
32 A sudden rise in the price of imported oil caused the annual rate of inflation in a given
period to be higher than expected.
What might be a likely result of this?
A Borrowers would gain. B Real wages would rise.
C The balance of trade would improve. D Unemployment would fall.
Understanding Economics 268 19 - Inflation

J/13/1/25
33 The table shows an index number of prices between 2009 and 2012.
In the base year of 2008, inflation was 2% per annum.
What was the first year in which the rate of inflation fell?

year price index

A 2009 103
B 2010 104
C 2011 104
D 2012 101

J/13/1/26
34 What will be the probable effect of an increase in indirect taxes on demand-pull inflation
and on cost-push inflation?

demand-pull cost-push
inflation inflation
A increase increase
B increase decrease
C decrease decrease
D decrease increase

N/13/1/24
35 The diagram illustrates what happens to aggregate demand (AD) and aggregate supply
(AS) in an economy during a year.

What explains the rise in the general AS

price level?

A boom in consumer spending

B higher taxes on company general P1
profits price level
C reduction in government- P AD1
financed projects
D rising costs of raw materials AD

O Q Q1
real output
N/13/1/25
36 What would increase both demand-pull and cost-push inflation?

A an appreciation of a country’s currency

B an increase in the cost of borrowing
C an increase in the level of its import tariffs
D an increase in the price of oil
Understanding Economics 269 19 - Inflation

J/14/1/26
37 What is not a possible cause of cost-push inflation?

A an increase in firms’ profit margins

B an increase in raw material prices
C an increase in the supply of money
D an increase in trade union power

N/14/1/25
38 The graph shows the rate of inflation in a country in a 5 year period.

What can be concluded from the graph?

A The price level fell during two years.

B The price level was highest during +
rate of
year 4.
inflation 0
C The value of money fell for 5 years. % 1 2 3 4 5
D The value of money rose in 1 year. – year

J/15/1/25
39 In an economy with an interest rate of 4% per annum, the rate of inflation falls from 5% to
3% per annum.
What will be a benefit of this fall?

A Menu costs will fall to zero.

B People on fixed incomes will be better off in real terms.
C Savers will gain in real terms.
D The purchasing power of the currency will rise.

N/15/1/25
40 An economy is experiencing accelerating cost-push inflation.
Which group is likely to be least concerned by this?

A borrowers B consumers
C creditors D exporters

J/16/1/21
41 A country experienced an annual deflation rate of 2% for four successive years.
Which statement is correct for the four-year period?

A The price level fell by 8%.

B The price level fell by less than 8%.
C The real value of money fell by 8%.
D The real value of money fell by less than 8%.