AP Macro AP Macro Money and Inflation 2 — Questions and Answers
Question 1: Demand-pull inflation is most likely to occur when:
- Aggregate demand increases while the economy is near full employment (Correct answer)
- The money supply is decreased by the central bank
- Production costs rise sharply
- The government raises taxes
Correct answer: Aggregate demand increases while the economy is near full employment
Demand-pull inflation arises when aggregate demand exceeds the economy's capacity to produce, pushing prices up.
Question 2: Which measure of inflation tracks the prices paid by producers for inputs and is considered a leading indicator of consumer price changes?
- CPI
- GDP deflator
- PPI (Correct answer)
- PCE index
Correct answer: PPI
The Producer Price Index (PPI) measures input costs for producers and often predicts future consumer price movements.
Question 3: If actual inflation turns out to be lower than expected, who benefits?
- Borrowers who locked in fixed-rate loans
- Lenders who made fixed-rate loans (Correct answer)
- The government as a net debtor
- Workers with cost-of-living adjustments
Correct answer: Lenders who made fixed-rate loans
Lenders benefit from unexpectedly low inflation because they are repaid in dollars with higher real purchasing power than anticipated.
Question 4: Stagflation is best described as a period of:
- High growth and low unemployment
- High inflation combined with high unemployment and stagnant output (Correct answer)
- Low inflation and rapid GDP expansion
- Deflation and falling unemployment
Correct answer: High inflation combined with high unemployment and stagnant output
Stagflation combines stagnant growth, high unemployment, and high inflation, often triggered by a negative supply shock.
Question 5: Which of the following best explains why moderate inflation can be preferred over deflation by policymakers?
- Deflation reduces government tax revenues
- Deflation encourages consumers to delay spending, worsening recessions (Correct answer)
- Moderate inflation increases export competitiveness
- Deflation raises the real wages of workers
Correct answer: Deflation encourages consumers to delay spending, worsening recessions
Deflation creates a deflationary spiral as consumers postpone purchases expecting lower future prices, reducing aggregate demand.
Question 6: The 'menu cost' of inflation refers to:
- The cost restaurants pay for food supplies
- The real resources used to change prices frequently during inflation (Correct answer)
- Government printing costs for new currency
- The tax burden on inflation-adjusted incomes
Correct answer: The real resources used to change prices frequently during inflation
Menu costs are the real resource costs—labor, printing, reprogramming—businesses incur when they must frequently update prices.
AP Macro AP Macro Money and Inflation 2
Demand-pull inflation is most likely to occur when: