2.3 Inflation

• Inflation reduces the purchasing power of money
• Cost-push inflation arises from increased production costs
• Inflation can erode the real value of savings
• What is the primary cause of cost-push inflation?

  Increased production costs
• The GDP Deflator measures the price level of all final goods and services
• The GDP Deflator measures the price level of all final goods and services included in the GDP
• The GDP deflator measures the price level of all final goods and services
• Supply shocks can drive up production costs and lead to inflation
• What is a common cause of demand-pull inflation?

  Increased consumer confidence
• The CPI focuses on household expenses, while the GDP deflator measures overall economy price levels.


  True
• Central banks raise interest rates to reduce borrowing and spending during inflation.


  True
• Wage and price controls can distort market signals and lead to shortages.
• The Consumer Price Index (CPI) tracks changes in the prices of all final goods and services in an economy.

  False
• Arrange the following causes of inflation in order of their potential impact:

  1️⃣ Increased Money Supply

  2️⃣ Government Spending

  3️⃣ Supply Shocks
• Match the type of inflation with its cause:

  Demand-Pull Inflation ↔️ Excess aggregate demand

  Cost-Push Inflation ↔️ Rising production costs
• The CPI includes all goods and services produced in an economy.

  False
• The CPI tracks changes in the prices of a basket of goods and services commonly purchased by businesses.

  False
• The CPI and GDP deflator may provide different readings of inflation trends.


  True
• Inflation reduces the purchasing power of money.

  True
• Cost-push inflation arises from increased production costs.
• What is one effect of higher government expenditures on inflation?

  Increased aggregate demand
• What is one fiscal policy tool used to manage inflation?

  Spending cuts
• What is the definition of inflation?

  Sustained increase in price level
• What type of inflation occurs when aggregate demand exceeds aggregate supply?

  Demand-pull inflation
• What is one effect of inflation on wages?

  Wage stagnation
• Demand-pull inflation occurs when prices are pushed up by rising production costs.

  False
• What is the impact of inflation on the purchasing power of money?

  Decreased purchasing power
• What is one example of a factor that can cause cost-push inflation?

  Increased material costs
• What does the Consumer Price Index (CPI) track changes in?

  Prices of household goods
• What happens to prices when the money supply increases without a corresponding increase in output?

  Prices rise
• Match the type of inflation with its description:

  Demand-Pull Inflation ↔️ Excess demand pulls prices up

  Cost-Push Inflation ↔️ Increased costs push prices up
• Inflation may cause wages to stagnate, leading to decreased real income.