0455 Economics

Monthly Test: Inflation

Name:__________________ Class & Section:___________________

Paper 1 (MCQs)

1 An economy is operating with all resources fully employed.

Which would be an outcome of a significant increase in government expenditure?

A deflation
B demand-pull inflation
C falling output
D increased employment

2 What is a cause of demand-pull inflation?

A a surplus of skilled labour
B higher government expenditure
C higher tax rates
D lower net exports

3 How is the rate of inflation measured?

A by calculating the change in the price of goods and services from one year to the next
B by calculating the real value of all output of goods and services in an economy
C by calculating the total number of people willing and able to work but cannot find work
D by calculating the total value of exports minus the total value of imports

4 Rates of inflation and deflation are measured using a consumer prices index (CPI) over a
period of time.

The table shows average rates of CPI for Japan from 2010–2014.

In which period did Japan experience deflation followed by inflation?

A 2010–2011 B 2011–2012 C 2012–2013 D 2013–2014

5 Venezuela, a leading world oil producer, has experienced hyperinflation of over 400% per
annum in recent years.

How does hyperinflation affect an economy?

6 The graph shows the rate of inflation in a country between 2000 and 2014.

What can be concluded about average prices?

A They fell throughout the period.

B They peaked in 2000.
C They rose each year.
D They were lower in 2014 than they were in 2010.

7 Which country is suffering from the worst deflation?

8 What is likely to assist a government’s policy of reducing inflation?

A allowing businesses to borrow money for longer periods

B encouraging the public to spend more money
C increasing lending to members of the public
D raising the interest rate on credit card borrowing

9 What is used to measure inflation?

A the consumer prices index (CPI)

B the exchange rate
C the gross domestic product (GDP)
D the index of workers’ wages

10 What, when increased, will help a government to reduce the rate of inflation?

A budget deficit
B consumer spending
C income tax
D pensions

11 Which policy aims to maintain low inflation over a period of time?

A imposing a minimum wage to be paid to workers

B reducing interest rates to encourage borrowing
C restricting the supply of money through the central bank
D writing off the debts of low-income countries

12 A finance minister reported that the economy was experiencing inflation and economic
growth.

What would be evidence that both of these had occurred?

A increased exports and increased output

B increased imports and increased income tax
C increased interest rates and increased net migration
D increased prices and increased employment

13 The table shows the Consumer Prices Index (CPI) for selected cities for August 2015
relative to New York, USA at 100.

What can be concluded from the table?

A Geneva had the highest average price level.

B Living standards were highest in Lima.
C Singapore was more expensive than Oslo.
D The annual rate of inflation was the same in Istanbul and Johannesburg.

14 Why would an increase in the interest rate potentially lead to lower inflation?

A Consumers will be more willing to save when interest rates are high.
B Consumers will be more willing to spend when interest rates are high.
C Producers will be more willing to borrow from banks when interest rates are high.
D Producers will be more willing to invest when interest rates are high.

15 A government significantly increases its spending on education and training over several
years.

What will be the likely effect of this policy measure on the rate of inflation in both the short
run
and the long run?

16 In a country, inflation is 10% and nominal interest rates are 7%.

Which group is most likely to benefit from this situation?

A borrowers
B employers
C lenders
D savers

17 A country wishes to reduce the level of inflation.

Which combination of policy measures will be most successful?

18 An economy has a high rate of inflation. In response to this, its government increases
income tax.

What is the most likely reason for this increase?

A to discourage the consumption of harmful goods

B to raise money for government spending
C to redistribute income
D to reduce total demand

19 Interest rates are sometimes raised to control inflation.

Why might this policy be effective?

A Consumers may save more.
B Government spending may increase.
C Investment may be encouraged.
D The exchange rate may fall.

20 A country’s inflation rate, measured by the Consumer Prices Index (CPI), was 3% in year
1. Three years later it was 0.8%.

What can be concluded from this information?

A Prices are falling.

B The rate of price increases is falling.
C The real rate of interest is negative.
D There is increased purchasing power for those on fixed incomes.

21 In a year, two changes occurred in a company.

Company directors’ salaries increased by 15%.

Office workers’ wages increased by 5%.

The rate of inflation was 3.4%.

What happened to real income?

22 The table shows changes in the Consumer Prices Index (CPI) from the base year, 1, and
for the next three years.

Which statement is correct?

A Consumer prices were highest in year 3.

B The rate of inflation was 2.1% in year 4.
C The rate of inflation was highest in year 2.
D The rate of inflation was lowest in year 1.

23 The table shows the Consumer Prices Index (CPI) of a country for five years.
Which statement about the country is correct?

A It faced deflation in year 2.

B It faced deflation in year 3.
C It faced inflation in year 4.
D It faced inflation in year 5.

24 What may cause deflation?

A advances in technology and increases in labour productivity

B government using a policy of very low interest rates
C increases in the costs of production that reduce firms’ profits
D increases in the rate of inflation as measured by the CPI

25 A government has a contractionary fiscal policy to reduce inflation. What will the
government increase?

A expenditure on infrastructure
B income tax rates
C personal tax allowances
D unemployment benefits

26 The table gives information about three economic indicators in four countries.

What may be concluded from this information?

A Countries with higher inflation have higher interest rates.

B Countries with higher interest rates have lower unemployment.
C The country with the lowest inflation had the highest unemployment.
D The country with the lowest unemployment had the lowest inflation.

27 In Uganda, the rate of inflation fell from 5% in 2014 to 2% in 2015.

Which conclusion can be drawn from this information?

A Prices were higher in 2015 than in 2014.
B The cost of living fell between 2014 and 2015.
C The standard of living fell between 2014 and 2015.
D Ugandan citizens were better off in 2015 than 2014.

28 A country is experiencing a period of full employment.

What is most likely to lead to an increase in demand-pull inflation?

A an increase in government spending

B an increase in imports
C an increase in income tax rates
D an increase in sales tax

29 The diagram shows percentage (%) changes in prices and wages over time.

What does the diagram indicate?

A Inflation is proportionately related to wage levels.

B The gap between wages and prices is constant.
C Wages are highest in 2010.
D Wage earners have increasingly less purchasing power.

30 What might cause prices to rise because of cost-push inflation?

A an increase in government spending on education

B an increase in household consumption
C an increase in the balance of payments surplus
D an increase in wages and salaries

31 In January 2016 the rate of inflation in a country changed from 3% to 2%. In March 2016
the rate of inflation was 4%.

What happened to the price level in January and March?

32 A basket of goods is used to calculate a country’s rate of inflation.

What is included in the basket of goods?

A a representative sample of current household spending

B all goods bought in the country
C the spending on an unchanging group of necessities
D the 50 most popular items of household spending
33 What is meant by deflation?

A a fall in the general price level

B a fall in the international value of a currency
C a fall in the rate of inflation
D a fall in the real value of money
34 A country has rapidly increasing inflation.

What is an example of a monetary policy measure to reduce this problem?

A increasing income tax

B increasing interest rates
C introducing maximum prices for some products
D subsidising key industries
35 The table shows the Consumer Prices Index (CPI) of an economy.

What can be concluded from the data?

A Prices fell between years 4 and 5.

B Prices rose in every year.
C The rate of inflation rose 5% in year 4.
D There was a fall in living standards by year 5.
36 Deflation is a sustained fall in the general price level.

What might cause deflation?

A insufficient private capital investment

B loss of confidence in the government’s economic policies
C rising oil prices
D shortages of skilled labour in relation to demand
37 The table shows some data about an economy.
What happened in year 1?

A Both prices and real incomes fell.

B Both prices and real incomes rose.
C Prices fell but real incomes rose.
D Prices rose but real incomes fell.
38 What is included in the construction of the Consumer Prices Index (CPI)?

A a base year
B incomes
C price elasticity of demand
D quantity supplied
39 A person receives annual interest of 4% on their savings. Inflation is 5% per annum.

What is the approximate change in the real value of their savings?

A – 5% B – 1% C + 4% D + 9%
40 An increase in which of the following is least likely to cause inflation?

A consumer spending
B government spending
C income tax
D wages
41 What would be least likely to act as a store of value during a period of rapid inflation?

A cash
B gold
C property
D shares
42 An economy experienced deflation.

Which combination shows the likely outcome of this?

43 An economy is suffering from a period of deflation.

What does this mean for the economy?

A Consumers may delay purchase of some products.

B Purchasing power of consumers falls.
C Tax revenues for the government will rise.
D The real value of personal savings falls.
44 In a year the rate of inflation in a country was 3%. During that year company managers’
salaries rose by 6% and office workers’ wages rose by 2%.

What happened to real income (purchasing power)?

 Paper 2 (Structured Questions)
1 Voralberg, a region in Austria, has the highest income and best healthcare of any region in Austria.
It benefits from its short distance to Germany and Switzerland, and from the free trade between these
countries. However, Voralberg hosts only a small number of foreign multinational companies
(MNCs) and its inflation is higher than most areas in Europe.

(d) Discuss whether or not inflation is always a disadvantage to an economy. [8]

 Marking Scheme
1. B
2. B
3. A
4. C
5. D
6. C
7. A
8. D
9. A
10. C
11. C
12. D
13. A
14. A
15. C
16. A
17. D
18. D
19. A
20. B
21. D
22. C
23. C
24. A
25. B
26. A
27. A
28. A
29. D
30. D
31. D
32. A
33. A
34. B
35. A
36. B
37. D
38. A
39. B
40. C
41. A
42. A
43. A
44. C