Q1. What does the inflation rate measure?
The inflation rate is the percentage change in a broad measure of prices over a specified period.
Economics
Quiz: Understanding Inflation
Sample questions from this book. Open the app for the full chapter quizzes and final exam.
Q2. If prices continue to rise but at a slower rate than before, what is occurring?
Disinflation means inflation is slowing; prices are still rising, but less quickly.
Q3. Why might housing costs have a stronger effect on a consumer price index than an infrequently purchased item?
Indexes use spending weights, so items that represent a larger share of typical household spending generally have more influence.
Q4. Which example best illustrates cost-push inflation?
Cost-push inflation occurs when rising production or delivery costs contribute to higher prices.
Q5. What is one possible effect of a central bank raising interest rates to reduce inflationary pressure?
Higher interest rates can discourage borrowing and spending, cooling demand, but may also slow investment and economic activity.
Q6. Why do some categories have more influence on a consumer price index than others?
Weights generally reflect how much households spend on each category, so a category with a larger spending share has more influence on the combined index.
Q7. An index rises from 120 to 123 over a year. What is the approximate year-over-year inflation rate?
The increase is 3 index points, and 3 divided by the starting value of 120 equals 0.025, or 2.5 percent.
Q8. What does a falling inflation rate usually mean?
A lower inflation rate means the index is increasing more slowly. Prices may still be rising, just at a reduced pace.