Inflation and Deflation: Causes, Effects, Measurement, Policies to Control Inflation

1. Inflation means

A a fall in the general price level
B a rise in the general price level
C a fall in unemployment only
D a rise in real GDP only

2. Deflation means

A a fall in the general price level
B a slower rise in the general price level
C a rise in the money supply only
D a rise in consumer spending only

3. Disinflation means

A prices are falling
B inflation rate is falling but prices are still rising
C GDP is falling
D unemployment is zero

4. If the inflation rate falls from 12% to 8%, this is

A deflation
B disinflation
C hyperinflation
D stagflation only

5. If the price index falls from 120 to 116, this shows

A inflation
B deflation
C disinflation
D economic growth

6. If the Consumer Prices Index rises from 100 to 108, the inflation rate is

A 4%
B 8%
C 10%
D 108%

7. If CPI rises from 125 to 135, the inflation rate is

A 7.4%
B 8%
C 10%
D 135%

8. If CPI rises from 160 to 168, the inflation rate is

A 5%
B 8%
C 10%
D 168%

9. If CPI falls from 200 to 190, the rate of deflation is

A 5%
B 10%
C 90%
D 190%

10. Which is most likely to measure inflation?

A Consumer Prices Index
B Human Development Index
C unemployment rate
D current account balance

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

11. Demand-pull inflation is caused by

A aggregate demand rising faster than aggregate supply
B production costs falling
C unemployment rising due to recession
D exports becoming impossible

12. Cost-push inflation is caused by

A falling wages
B rising production costs
C falling aggregate demand
D lower import prices

13. Which is most likely to cause demand-pull inflation?

A lower consumer spending
B higher interest rates
C rapid increase in consumption and investment
D lower government spending

14. Which is most likely to cause cost-push inflation?

A lower oil prices
B higher productivity
C higher wages not matched by productivity
D lower indirect taxes

15. A rise in world oil prices is most likely to cause

A cost-push inflation
B demand-pull inflation only
C deflation
D lower production costs

16. A government sharply increases spending when the economy is near full capacity. What may result?

A demand-pull inflation
B cost-push deflation
C lower aggregate demand
D lower price level guaranteed

17. A depreciation of the exchange rate may cause inflation because

A imports become cheaper
B imports become more expensive
C exports become impossible
D domestic demand must fall to zero

18. Which is most likely to reduce inflationary pressure?

A higher interest rates
B lower interest rates
C lower income tax
D higher consumer borrowing

19. Which is most likely to increase demand-pull inflation?

A higher taxes
B lower government spending
C lower interest rates
D lower wages in all industries

20. Which is most likely to reduce cost-push inflation in the long run?

A improving productivity
B increasing indirect taxes
C raising import prices
D reducing technology

21. Which is a possible cause of inflation?

A excessive growth of the money supply
B fall in all wages
C fall in aggregate demand
D fall in import prices

22. Which statement is correct?

A all price rises are inflation
B inflation is a sustained rise in the general price level
C inflation means every single price must rise
D inflation means real GDP must rise

23. Which is most likely during high inflation?

A money loses purchasing power
B money becomes a better store of value
C real value of savings always rises
D prices become perfectly stable

24. If inflation is 20% and a worker’s wage rises by 10%, what happens to real income?

A rises by about 10%
B falls because wage rises slower than prices
C stays unchanged
D doubles

25. If inflation is 5% and a worker’s wage rises by 8%, what happens to real income?

A rises
B falls
C stays exactly the same
D becomes zero

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

26. Which group is most likely to lose from unexpected inflation?

A savers holding cash
B borrowers with fixed-rate debt
C firms whose selling prices rise faster than costs
D workers whose wages rise faster than inflation

27. Which group may gain from unexpected inflation?

A borrowers repaying fixed nominal debts
B people holding cash savings
C workers with fixed wages below inflation
D pensioners on fixed incomes

28. Why may borrowers gain from inflation?

A the real value of debt repayments falls
B the nominal value of debt always rises automatically
C interest rates must be zero
D inflation removes the need to repay loans

29. Why may savers lose from inflation?

A the real value of savings may fall
B savings become physical goods
C interest is always higher than inflation
D prices fall rapidly

30. Which is a cost of inflation to firms?

A uncertainty about future costs and prices
B guaranteed higher real profits
C lower menu costs
D perfectly stable planning

31. Menu costs are

A costs of changing prices, catalogues or price lists
B costs of employing waiters only
C costs of importing food only
D costs of unemployment benefits

32. Shoe-leather costs refer to

A the cost of workers’ uniforms only
B time and effort spent reducing cash holdings during inflation
C costs of producing shoes only
D costs of transport infrastructure

33. Which is a possible effect of high inflation on exports?

A exports may become less competitive if domestic prices rise faster than foreign prices
B exports must always rise
C imports must become zero
D exchange rates become irrelevant

34. If a country has higher inflation than its trading partners, its goods may become

A more price competitive
B less price competitive
C free goods
D public goods

35. Which is a possible effect of deflation?

A consumers may delay purchases expecting lower prices
B consumers always buy more immediately
C real value of debt always falls
D firms always increase investment

36. Why can deflation be harmful?

A falling prices may reduce firms’ revenue and cause unemployment
B it always causes full employment
C it always raises firm profits
D it means aggregate demand is always too high

37. Which is most likely to cause deflation?

A fall in aggregate demand
B rapid rise in consumer spending
C rise in wage costs
D increase in import prices

38. Which policy is most likely to reduce demand-pull inflation?

A contractionary monetary policy
B lower interest rates
C higher government spending
D lower direct taxes

39. Contractionary monetary policy may include

A higher interest rates
B lower interest rates
C higher subsidies
D lower reserve requirements only

40. Contractionary fiscal policy may include

A higher taxes or lower government spending
B lower taxes and higher government spending
C lower interest rates
D more money printing

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

41. Which policy is most likely to reduce inflation by lowering aggregate demand?

A higher income tax
B lower income tax
C higher government spending
D lower interest rates

42. Which policy is most likely to reduce inflation by increasing productive capacity?

A supply-side policies such as education and infrastructure investment
B higher interest rates only
C reducing worker training
D reducing technology

43. Why may higher interest rates reduce inflation?

A borrowing becomes more expensive, reducing consumption and investment
B borrowing becomes cheaper, increasing demand
C saving becomes less attractive
D aggregate demand must rise

44. Why may higher income tax reduce inflation?

A disposable income falls, reducing consumption
B disposable income rises, increasing spending
C production costs always fall
D exports become free

45. Why might reducing government spending reduce inflation?

A aggregate demand falls
B aggregate demand rises
C imports become zero
D productive capacity always rises immediately

46. Which policy is most likely to reduce cost-push inflation caused by rising production costs?

A improving efficiency and productivity
B increasing indirect taxes
C raising minimum wages above productivity
D increasing import tariffs on raw materials

47. Which policy may control imported inflation?

A reducing dependence on expensive imports or appreciating the exchange rate
B depreciating the exchange rate always
C increasing import tariffs on essential imported inputs
D reducing domestic productivity

48. Which problem may result from using higher interest rates to control inflation?

A unemployment may rise if spending and output fall
B consumption always rises
C inflation must rise immediately
D borrowing becomes cheaper

49. Which problem may result from using higher taxes to control inflation?

A lower disposable income may reduce living standards
B consumption must rise
C aggregate demand must rise
D inflation becomes impossible forever

50. Which chain is most accurate?

A higher interest rates → borrowing falls → consumption/investment falls → aggregate demand falls → inflationary pressure falls
B higher interest rates → borrowing rises → demand rises → inflation falls automatically
C lower taxes → disposable income falls → spending falls → inflation rises
D higher government spending → demand falls → inflation falls automatically

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

1. Answer: B

A wrong: this is deflation.
B correct: inflation is a rise in the general price level.
C wrong: unemployment is a labour market issue.
D wrong: real GDP rising is economic growth.

2. Answer: A

A correct: deflation is a fall in the general price level.
B wrong: slower price rise is disinflation.
C wrong: money supply growth may cause inflation, not deflation itself.
D wrong: higher consumer spending may cause inflation.

3. Answer: B

A wrong: falling prices mean deflation.
B correct: disinflation means prices are still rising, but at a slower rate.
C wrong: GDP falling is negative growth/recession.
D wrong: unemployment is separate.

4. Answer: B

A wrong: prices are still rising by 8%, so not deflation.
B correct: inflation has fallen from 12% to 8%, so this is disinflation.
C wrong: hyperinflation is extremely high inflation.
D wrong: stagflation is inflation with stagnant output/high unemployment.

5. Answer: B

A wrong: inflation means index rises.
B correct: price index falls from 120 to 116, so general prices fall.
C wrong: disinflation means prices still rise, just slower.
D wrong: economic growth is real output rising.

6. Answer: B

A wrong: 4% is too low.
B correct: inflation = (108 – 100) / 100 × 100 = 8%.
C wrong: 10% is not the index change.
D wrong: 108 is the new index, not inflation rate.

7. Answer: B

A wrong: 7.4% uses the new index wrongly.
B correct: inflation = (135 – 125) / 125 × 100 = 8%.
C wrong: 10 is the index point increase, not percentage inflation.
D wrong: 135 is the index, not the inflation rate.

8. Answer: A

A correct: inflation = (168 – 160) / 160 × 100 = 5%.
B wrong: 8 is the index point rise, not percentage inflation.
C wrong: 10% is too high.
D wrong: 168 is the new index.

9. Answer: A

A correct: deflation = (200 – 190) / 200 × 100 = 5%.
B wrong: 10 is the index fall, not the percentage.
C wrong: 90% is not relevant.
D wrong: 190 is the new index.

10. Answer: A

A correct: CPI measures changes in consumer prices.
B wrong: HDI measures development.
C wrong: unemployment rate measures unemployment.
D wrong: current account balance measures external trade/payments.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

11. Answer: A

A correct: demand-pull inflation happens when aggregate demand rises faster than supply capacity.
B wrong: falling costs reduce inflationary pressure.
C wrong: recession usually reduces demand-pull inflation.
D wrong: exports becoming impossible is not the cause.

12. Answer: B

A wrong: falling wages reduce costs.
B correct: cost-push inflation is caused by rising costs of production.
C wrong: falling demand reduces inflationary pressure.
D wrong: lower import prices reduce costs.

13. Answer: C

A wrong: lower consumer spending reduces demand.
B wrong: higher interest rates reduce borrowing/spending.
C correct: rapid consumption and investment growth increases aggregate demand.
D wrong: lower government spending reduces aggregate demand.

14. Answer: C

A wrong: lower oil prices reduce costs.
B wrong: higher productivity reduces unit costs.
C correct: wages rising faster than productivity increase unit labour costs.
D wrong: lower indirect taxes reduce prices.

15. Answer: A

A correct: oil is a key production input, so higher oil prices raise firms’ costs.
B wrong: this is cost-push, not demand-pull only.
C wrong: higher oil prices usually raise prices, not lower them.
D wrong: oil price rises increase costs.

16. Answer: A

A correct: higher government spending near full capacity raises demand faster than output can rise.
B wrong: this is not cost-push deflation.
C wrong: government spending raises aggregate demand.
D wrong: prices are not guaranteed to fall.

17. Answer: B

A wrong: depreciation makes imports dearer.
B correct: dearer imports raise costs and consumer prices.
C wrong: exports may become cheaper abroad, not impossible.
D wrong: domestic demand does not have to fall to zero.

18. Answer: A

A correct: higher interest rates reduce borrowing, spending and aggregate demand.
B wrong: lower interest rates increase demand.
C wrong: lower income tax increases disposable income and demand.
D wrong: more borrowing increases spending.

19. Answer: C

A wrong: higher taxes reduce demand.
B wrong: lower government spending reduces demand.
C correct: lower interest rates increase borrowing and spending.
D wrong: lower wages may reduce costs and demand.

20. Answer: A

A correct: higher productivity lowers unit costs, reducing cost-push pressure.
B wrong: indirect taxes raise costs/prices.
C wrong: higher import prices raise production costs.
D wrong: less technology reduces productivity.

21. Answer: A

A correct: excessive money supply growth can increase spending and prices.
B wrong: falling wages reduce costs.
C wrong: falling demand reduces inflationary pressure.
D wrong: cheaper imports reduce inflationary pressure.

22. Answer: B

A wrong: one product rising in price is not necessarily inflation.
B correct: inflation is a sustained rise in the general price level.
C wrong: not every single price must rise.
D wrong: inflation can occur without real GDP rising.

23. Answer: A

A correct: each unit of money buys fewer goods and services.
B wrong: inflation weakens money as a store of value.
C wrong: real savings may fall.
D wrong: prices are unstable in high inflation.

24. Answer: B

A wrong: nominal wage rises, but real wage falls.
B correct: prices rise faster than wages, so purchasing power falls.
C wrong: real income would stay unchanged only if wages rose by 20%.
D wrong: wage does not double.

25. Answer: A

A correct: wages rise faster than prices, so real income rises.
B wrong: real income does not fall.
C wrong: it would stay same if wage rose by 5%.
D wrong: real income does not become zero.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

26. Answer: A

A correct: cash savings lose purchasing power if inflation is higher than interest earned.
B wrong: borrowers may gain as real debt burden falls.
C wrong: firms may gain if prices rise faster than costs.
D wrong: workers whose wages beat inflation gain.

27. Answer: A

A correct: borrowers repay fixed nominal debts with money worth less in real terms.
B wrong: cash savers lose purchasing power.
C wrong: fixed wages below inflation reduce real income.
D wrong: fixed-income pensioners lose purchasing power.

28. Answer: A

A correct: inflation reduces the real burden of fixed nominal repayments.
B wrong: nominal debt does not automatically rise.
C wrong: interest rates do not have to be zero.
D wrong: loans still need repayment.

29. Answer: A

A correct: if inflation exceeds interest, savings lose purchasing power.
B wrong: savings do not become physical goods.
C wrong: interest is not always higher than inflation.
D wrong: falling prices are deflation.

30. Answer: A

A correct: inflation creates uncertainty over costs, wages, prices and investment decisions.
B wrong: real profits are not guaranteed.
C wrong: menu costs rise when prices change often.
D wrong: planning becomes less stable.

31. Answer: A

A correct: menu costs are costs of updating prices, menus, catalogues and labels.
B wrong: not just restaurant waiter costs.
C wrong: not import food costs.
D wrong: not unemployment benefit costs.

32. Answer: B

A wrong: not literal shoe/uniform costs only.
B correct: shoe-leather costs are time/effort spent managing cash during inflation.
C wrong: not shoe production costs.
D wrong: not infrastructure costs.

33. Answer: A

A correct: higher domestic inflation can make exports more expensive and less competitive.
B wrong: exports do not always rise.
C wrong: imports do not become zero.
D wrong: exchange rates still matter.

34. Answer: B

A wrong: higher domestic inflation makes goods dearer.
B correct: goods become less price competitive compared with trading partners.
C wrong: they do not become free goods.
D wrong: they do not become public goods.

35. Answer: A

A correct: expected lower prices may make consumers postpone spending.
B wrong: consumers may delay purchases.
C wrong: deflation increases the real value of debt.
D wrong: firms may cut investment.

36. Answer: A

A correct: falling prices reduce revenue and may lead to cuts in output/jobs.
B wrong: deflation can increase unemployment.
C wrong: profits may fall.
D wrong: deflation often reflects weak aggregate demand.

37. Answer: A

A correct: lower aggregate demand puts downward pressure on prices.
B wrong: higher spending causes inflationary pressure.
C wrong: higher wages cause cost-push inflation.
D wrong: higher import prices cause inflation.

38. Answer: A

A correct: contractionary monetary policy reduces borrowing and spending.
B wrong: lower interest rates increase demand.
C wrong: higher government spending increases demand.
D wrong: lower direct taxes increase disposable income.

39. Answer: A

A correct: higher interest rates are contractionary monetary policy.
B wrong: lower interest rates are expansionary.
C wrong: subsidies are fiscal/supply-side intervention.
D wrong: lower reserve requirements increase lending.

40. Answer: A

A correct: higher taxes or lower government spending reduce aggregate demand.
B wrong: lower taxes and higher spending are expansionary.
C wrong: lower interest rates are monetary policy and expansionary.
D wrong: money printing increases money supply.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

41. Answer: A

A correct: higher income tax reduces disposable income and consumption.
B wrong: lower income tax increases demand.
C wrong: higher spending increases demand.
D wrong: lower interest rates increase borrowing/spending.

42. Answer: A

A correct: education and infrastructure improve productivity and supply capacity.
B wrong: higher rates reduce demand, not capacity directly.
C wrong: reducing training lowers capacity.
D wrong: reducing technology worsens productivity.

43. Answer: A

A correct: higher borrowing costs reduce consumption and investment.
B wrong: borrowing becomes dearer, not cheaper.
C wrong: saving becomes more attractive.
D wrong: aggregate demand usually falls.

44. Answer: A

A correct: higher income tax reduces disposable income and consumer spending.
B wrong: disposable income falls, not rises.
C wrong: production costs do not always fall.
D wrong: exports do not become free.

45. Answer: A

A correct: lower public spending reduces aggregate demand.
B wrong: aggregate demand falls, not rises.
C wrong: imports do not become zero.
D wrong: capacity does not rise immediately.

46. Answer: A

A correct: efficiency/productivity reduces unit costs, easing cost-push inflation.
B wrong: indirect taxes increase prices.
C wrong: excessive wage rises increase costs.
D wrong: tariffs on inputs raise costs.

47. Answer: A

A correct: fewer expensive imports or stronger currency can lower import cost pressure.
B wrong: depreciation makes imports dearer.
C wrong: tariffs on essential inputs raise import costs.
D wrong: lower productivity increases cost pressure.

48. Answer: A

A correct: lower spending may reduce output and labour demand, increasing unemployment.
B wrong: consumption usually falls.
C wrong: inflationary pressure usually falls.
D wrong: borrowing becomes dearer.

49. Answer: A

A correct: higher taxes reduce disposable income and may lower living standards.
B wrong: consumption usually falls.
C wrong: aggregate demand usually falls.
D wrong: inflation can return later.

50. Answer: A

A correct: higher rates reduce borrowing and spending, lowering demand-pull inflation pressure.
B wrong: higher rates reduce borrowing.
C wrong: lower taxes increase disposable income.
D wrong: higher government spending raises demand.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.