Inflation MCQ 2

What type of inflation is caused by an increase in indirect taxes?

What is the effect of currency depreciation on import prices?

What is the result of an economy printing too much money?

During economic growth, what happens to employment and income?

What type of inflation is caused by rising incomes?

What is the primary consequence of consumers deferring spending during deflationary periods?

Why do firms reduce costs during deflation?

What is a consequence of investment falling during deflationary periods?

What happens to consumer spending during deflation?

What is a direct consequence of deflation on employment?

Causes of Inflation

During periods of economic growth, rising incomes lead to increased demand for goods and services, causing demand-pull inflation.
Increase in indirect taxes, such as the Carbon Tax on fuel, results in price rises for goods and services upon which these taxes are levied.

Cost-Push Inflation

Higher costs of production lead to cost-pull inflation.

Exchange Rate and Inflation

Currency depreciation, such as a decrease in the value of the euro, increases the cost of US imports for EU consumers.

Monetary Policy and Inflation

Excessive money printing leads to a fall in the value of money, contributing to inflation.

Inflation and Deflation

Deflation

Deflation is a gradual fall in the general level of prices.

Effects of Deflation

Consumer spending decreases as consumers delay purchases, expecting prices to fall further, slowing down money circulation in the economy.
Investment decreases during uncertain periods, following the Law of Supply.
Employment falls as firms:
- Make less money due to reduced prices.
- Lower costs, including:
  - Lowering wages.
  - Cutting the number of employees.

This quiz covers the various factors that contribute to inflation, including rising incomes, indirect taxes, higher costs of production, and currency depreciation.