Test Your Knowledge: Causes of Inflation Quick Quiz

📚 Quick Study Guide

• 💰 Demand-Pull Inflation: Occurs when aggregate demand exceeds aggregate supply, leading to increased prices. Think of it as too much money chasing too few goods.
• 🏭 Cost-Push Inflation: Arises when the costs of production (wages, raw materials) increase, forcing businesses to raise prices to maintain profits.
• 📈 Built-In Inflation: A self-perpetuating type of inflation where wages and prices increase in response to each other. Often linked to adaptive expectations.
• 🧮 Money Supply: An increase in the money supply without a corresponding increase in goods and services can lead to inflation (Quantity Theory of Money).
• 🌍 Exchange Rates: A weaker domestic currency can lead to imported inflation as imported goods become more expensive.

Practice Quiz

1. Which of the following is a cause of demand-pull inflation?
   1. Increased government spending
   2. Decreased consumer confidence
   3. Lower interest rates
   4. Increased savings rates
2. Cost-push inflation is most likely caused by:
   1. Increased aggregate demand
   2. Rising wages and raw material costs
   3. Decreased government spending
   4. Lower consumer spending
3. What is the primary driver of built-in inflation?
   1. External economic shocks
   2. Wage and price spirals
   3. Technological advancements
   4. Changes in consumer preferences
4. According to the Quantity Theory of Money, inflation is primarily caused by:
   1. Decreases in the money supply
   2. Increases in the money supply
   3. Stable money supply
   4. Fluctuations in interest rates
5. How can a weaker domestic currency impact inflation?
   1. By decreasing the cost of imported goods
   2. By increasing the cost of exported goods
   3. By decreasing the cost of exported goods
   4. By increasing the cost of imported goods
6. Which of the following is NOT a typical cause of inflation?
   1. Increased productivity
   2. Rising energy prices
   3. Increased government debt
   4. Higher consumer demand
7. What is the likely effect of increased taxes on businesses regarding inflation?
   1. Decrease cost-push inflation
   2. Increase demand-pull inflation
   3. Increase cost-push inflation
   4. Decrease demand-pull inflation