Inflation and its Effects Quiz

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What effect does high inflation have on lenders and borrowers?

Both lenders and borrowers benefit
Both lenders and borrowers suffer
Borrowers benefit while lenders suffer
Lenders benefit while borrowers suffer (correct)

What is one way in which expansionary fiscal policy can contribute to high inflation?

Increasing government spending without increasing taxes (correct)
Decreasing government spending without decreasing taxes
Decreasing taxes without changing government spending
Increasing taxes without changing government spending

How does inflation affect the real return of a lender or investor?

Does not affect the real return
Increases the nominal return
Increases the real return
Reduces the real return (correct)

What is the Fisher effect related to in the context of inflation and interest rates?

Expectations on inflation determining nominal interest rates (A) Signup and view all the answers

Why do borrowers benefit when inflation is high?

They have to pay back loans with devalued currency (D) Signup and view all the answers

How does printing a large quantity of money for government services impact inflation?

It devalues the local currency and leads to inflation (C) Signup and view all the answers

What causes inflation according to the text?

Excessive growth of the money supply compared to real GDP growth (D) Signup and view all the answers

What is the impact of an inflationary gap?

Actual unemployment lower than the natural rate (D) Signup and view all the answers

What is the long-run equilibrium in the economy according to the text?

Intersection of short-run aggregate supply, long-run aggregate supply, and aggregate demand (A) Signup and view all the answers

Why is allowing the short-run aggregate supply to adjust towards full-employment problematic?

Slow adjustment due to sticky wages (B) Signup and view all the answers

What characterizes an economy with unnaturally low unemployment according to the text?

Actual output above potential output (C) Signup and view all the answers

How does an inflationary gap affect the demand-pull inflation according to the text?

Employees demanding higher wages due to extra hours worked (A) Signup and view all the answers

What will happen if the money supply increases faster than the growth in real output?

Inflation will occur (D) Signup and view all the answers

According to the economists, what is the reason for prices to stay the same when money supply increases at the same rate as real output?

Consumers expect inflation (D) Signup and view all the answers

In the context of inflation, what is a major problem associated with high and volatile rates of inflation?

Price signals misinterpretation (A) Signup and view all the answers

What is the effect of an increase in real demand for goods and services on prices according to the text?

Prices go up (B) Signup and view all the answers

Why does low and stable inflation not cost much to consumers according to the text?

Consumers can make long-term plans with certainty (A) Signup and view all the answers

What do economists believe is the reason behind inflation occurring in a depressed economy?

Too much money chasing too few goods (A) Signup and view all the answers