AP Macro AP Macro Money and Inflation 2

Question 1

Demand-pull inflation is most likely to occur when:

Accepted Answer

Aggregate demand increases while the economy is near full employment

Answer

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?

Accepted Answer

PPI

Answer

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?

Accepted Answer

Lenders who made fixed-rate loans

Answer

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:

Accepted Answer

High inflation combined with high unemployment and stagnant output

Answer

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?

Accepted Answer

Deflation encourages consumers to delay spending, worsening recessions

Answer

Deflation creates a deflationary spiral as consumers postpone purchases expecting lower future prices, reducing aggregate demand.

AP Practice Test