Chapter MCQ Test 2: Inflation | Class 12 Economics

Question 1 of 10

After a sharp rise in global crude-oil prices, transport and production costs climb and the price level rises. This is:

Cost-push inflation

Demand-pull inflation

Deflation

Disinflation

Explanation: Higher input (oil) costs push up prices regardless of demand — cost-push inflation.

Question 2 of 10

A retired person on a fixed pension finds it harder to manage during inflation because:

Their fixed income buys fewer goods as prices rise

Their income rises automatically

Prices fall

They are a borrower

Explanation: Fixed money income with rising prices means falling real income — a classic loser from inflation.

Question 3 of 10

A businessman who borrowed heavily before a period of high inflation effectively benefits because the loan is repaid in money that is:

Worth less than when it was borrowed

Worth more

Tax-free

Doubled

Explanation: Inflation erodes the real value of the fixed debt, so borrowers gain at lenders' expense.

Question 4 of 10

To fight clear demand-pull inflation, the most appropriate combination is:

Tight monetary policy plus contractionary fiscal policy

Easy money plus more spending

Lower taxes and lower repo rate

Print money

Explanation: Reducing both credit and government demand directly attacks the excess demand causing the inflation.

Question 5 of 10

Mild creeping inflation is sometimes seen as helpful because it can:

Encourage producers to invest and produce more

Destroy the currency

Cause hyperinflation at once

Stop all trade

Explanation: A gentle, predictable rise in prices can raise expected profits and encourage production and investment.

Question 6 of 10

A government importing onions and releasing wheat from buffer stocks during a price spike is using:

Supply-side measures

Monetary policy

A tax cut

Devaluation

Explanation: Adding to the supply of scarce goods directly eases their prices — a supply-side anti-inflation measure.

Question 7 of 10

Why can cost-push inflation be harder to cure with tight monetary policy alone?

It comes from supply costs, not excess demand, so cutting demand may just cause unemployment

It is always demand-driven

Monetary policy is illegal

Prices never change

Explanation: Squeezing demand does not lower input costs, and may slow output (risking stagflation), so supply-side action is also needed.

Question 8 of 10

Holding gold and land during high inflation tends to protect wealth because their value:

Rises with the general price level (real assets)

Falls to zero

Is fixed in money terms

Becomes a debt

Explanation: Real assets keep pace with inflation, unlike cash whose purchasing power erodes.

Question 9 of 10

The Reserve Bank's main goal in setting interest rates is usually described as keeping inflation:

Low and stable

As high as possible

Exactly zero always

Negative

Explanation: Modern central banks aim for low, stable inflation to support steady growth and protect purchasing power.

Question 10 of 10

Inflation 'redistributes' income, which means it:

Shifts real income from some groups (lenders, fixed-income earners) to others (borrowers, traders)

Gives everyone equal income

Removes all income

Only affects the government

Explanation: Because it hits groups unevenly, inflation transfers real purchasing power from losers to gainers.

Chapter MCQ Test 2 — Inflation