Inflation, Unemployment and Business Cycles MCQs 2026

Inflation is best defined as

1. A a one-day fall in one commodity price ✓
2. B a sustained rise in the general price level ✓
3. C a rise in unemployment only ✓
4. D a fall in money supply only ✓

Demand-pull inflation arises when

1. A costs of production fall sharply ✓
2. B money supply is frozen forever ✓
3. C aggregate demand exceeds aggregate supply at full employment ✓
4. D exports become zero ✓

Cost-push inflation is mainly caused by

1. A a sudden fall in all input prices ✓
2. B excess unused capacity only ✓
3. C rising production costs such as wages or raw materials ✓
4. D a permanent budget surplus only ✓

The Consumer Price Index (CPI) measures

1. A only stock market capitalization ✓
2. B only government bond yields ✓
3. C only the money multiplier ✓
4. D changes in the cost of a fixed basket of consumer goods and services ✓

The GDP deflator differs from CPI mainly because it

1. A covers all domestically produced final goods and services, not a fixed consumer basket ✓
2. B includes only imported luxury cars ✓
3. C ignores all price changes ✓
4. D is always equal to the unemployment rate ✓

Hyperinflation refers to

1. A extremely rapid and out-of-control price increases ✓
2. B mild seasonal price dips ✓
3. C stable zero inflation forever ✓
4. D deflation of asset prices only ✓

Creeping inflation is characterized by

1. A prices falling by 50% monthly ✓
2. B a slow and mild rise in prices over time ✓
3. C complete price freeze by law ✓
4. D zero change in any price ✓

Stagflation describes a situation of

1. A full employment with falling prices only ✓
2. B rapid growth with zero inflation only ✓
3. C budget surplus with free trade only ✓
4. D high inflation combined with high unemployment and stagnant growth ✓

The Phillips curve traditionally suggests a short-run trade-off between

1. A exports and imports only ✓
2. B inflation and unemployment ✓
3. C taxes and subsidies only ✓
4. D saving and investment only ✓

In the long run, the Phillips curve is often viewed as

1. A horizontal at zero inflation forever ✓
2. B identical to the demand curve ✓
3. C a 45-degree line through origin ✓
4. D vertical at the natural rate of unemployment ✓

Frictional unemployment results from

1. A a permanent collapse of all industries ✓
2. B normal job search and matching between workers and vacancies ✓
3. C only technological obsolescence of skills ✓
4. D only seasonal farm work ✓

Structural unemployment arises when

1. A workers' skills or locations do not match available jobs ✓
2. B everyone is between jobs for one week ✓
3. C prices fall temporarily ✓
4. D banks raise CRR slightly ✓

Cyclical unemployment is associated with

1. A voluntary leisure only ✓
2. B downturns in the business cycle and deficient demand ✓
3. C perfect full employment always ✓
4. D only seasonal tourism peaks ✓

Seasonal unemployment occurs when

1. A all industries shut forever ✓
2. B money supply doubles overnight ✓
3. C tariffs are removed ✓
4. D jobs are available only in certain seasons of the year ✓

The natural rate of unemployment includes

1. A only cyclical unemployment in deep recession ✓
2. B only hyperinflation effects ✓
3. C frictional and structural unemployment ✓
4. D zero unemployment by definition ✓

Full employment in macroeconomics usually means

1. A literally no one without a job ✓
2. B only government jobs for all ✓
3. C zero labour force participation ✓
4. D absence of cyclical unemployment, not zero unemployment ✓

Disguised unemployment is common in

1. A high-tech robotics plants only ✓
2. B central bank open market desks only ✓
3. C WTO dispute panels only ✓
4. D overmanned agriculture where marginal product of labour is near zero ✓

Deflation means

1. A a sustained fall in the general price level ✓
2. B a rise in CPI every month ✓
3. C an increase in money wages only ✓
4. D a budget deficit always ✓

Disinflation means

1. A prices rising faster every month ✓
2. B complete elimination of money ✓
3. C a slowdown in the rate of inflation, not necessarily falling prices ✓
4. D zero GDP growth by law ✓

A wage-price spiral contributes to

1. A permanent deflation only ✓
2. B zero money demand ✓
3. C fixed exchange rates only ✓
4. D cost-push inflation as wages and prices chase each other ✓

Imported inflation can occur when

1. A exports become free ✓
2. B rising import prices raise domestic costs and CPI ✓
3. C tariffs fall to zero always ✓
4. D remittances stop forever ✓

Core inflation typically excludes

1. A all services forever ✓
2. B only housing rents always ✓
3. C volatile food and energy prices ✓
4. D the entire CPI basket ✓

Demand-pull inflation is more likely when the economy is

1. A in deep depression with idle resources ✓
2. B barter-only with no money ✓
3. C autarkic with zero trade ✓
4. D near or at full capacity ✓

Okun's law relates

1. A changes in unemployment to changes in real GDP growth ✓
2. B tariffs to quotas only ✓
3. C CRR to SLR only ✓
4. D absolute to comparative advantage ✓

During a recession, cyclical unemployment typically

1. A falls to zero automatically ✓
2. B rises as output and hiring fall ✓
3. C becomes only frictional ✓
4. D equals the inflation rate ✓

The peak of a business cycle is the phase when

1. A output is at its lowest trough ✓
2. B recovery has not yet started ✓
3. C economic activity reaches a high point before turning down ✓
4. D prices are frozen by law ✓

The trough of a business cycle is

1. A the highest boom point ✓
2. B a permanent depression forever ✓
3. C identical to hyperinflation ✓
4. D the lowest point of activity before recovery begins ✓

Expansion (recovery) in the business cycle is marked by

1. A rising output, employment and income ✓
2. B falling GDP every quarter ✓
3. C rising mass unemployment only ✓
4. D collapse of all banks ✓

Contraction (recession) features

1. A falling output and rising unemployment ✓
2. B full employment boom only ✓
3. C zero price changes always ✓
4. D only surplus budgets ✓

A leading indicator of the business cycle tends to

1. A always lag GDP by two years ✓
2. B change before overall economic activity turns ✓
3. C never move with the cycle ✓
4. D equal the money multiplier ✓

A lagging indicator typically

1. A moves after the economy has already changed direction ✓
2. B predicts peaks months ahead always ✓
3. C is identical to CPI basket weights ✓
4. D replaces monetary policy ✓

Inflation reduces the real value of

1. A real GDP by definition always ✓
2. B physical capital stock overnight ✓
3. C money balances and fixed nominal incomes ✓
4. D comparative advantage ✓

Debtors tend to gain from unexpected inflation because

1. A they repay loans in money that buys less ✓
2. B interest rates always fall to zero ✓
3. C creditors forgive all debt ✓
4. D CPI becomes negative always ✓

Menu costs of inflation refer to

1. A costs of printing restaurant menus only ✓
2. B CRR deposits at SBP ✓
3. C tariff schedules at WTO ✓
4. D costs of frequently changing posted prices ✓

Shoe-leather costs of inflation arise from

1. A people holding less cash and making more trips to the bank ✓
2. B buying more shoes only ✓
3. C higher unemployment benefits ✓
4. D quota license fees ✓

Anticipated inflation is less harmful than unanticipated inflation because

1. A prices never change ✓
2. B contracts and wages can adjust in advance ✓
3. C money ceases to exist ✓
4. D unemployment becomes zero ✓

The misery index is often computed as

1. A exports minus imports only ✓
2. B CRR plus SLR only ✓
3. C inflation rate plus unemployment rate ✓
4. D tariff plus quota rates ✓

Underemployment differs from unemployment in that workers

1. A have no job and seek none ✓
2. B have jobs but work fewer hours or below skill level ✓
3. C are retired permanently ✓
4. D are only students ✓

Labour force participation rate measures

1. A labour force as a percentage of working-age population ✓
2. B only employed persons over GDP ✓
3. C only unemployed over CPI ✓
4. D exports over imports ✓

Unemployment rate is calculated as

1. A population divided by GDP ✓
2. B CPI divided by GDP deflator ✓
3. C M2 divided by M0 ✓
4. D unemployed persons divided by the labour force, times 100 ✓

Cost-of-living adjustments (COLA) aim to

1. A protect real incomes against inflation ✓
2. B raise structural unemployment ✓
3. C eliminate frictional search ✓
4. D fix the exchange rate ✓

Demand-deficient unemployment is another name for

1. A frictional unemployment only ✓
2. B cyclical unemployment ✓
3. C seasonal farm work only ✓
4. D voluntary leisure ✓

A boom phase of the cycle is associated with

1. A deep recession and mass layoffs ✓
2. B deflation and idle factories only ✓
3. C high output growth and low cyclical unemployment ✓
4. D zero credit creation ✓

Inflation targeting by a central bank means

1. A fixing the unemployment rate at zero ✓
2. B setting and pursuing a public inflation rate objective ✓
3. C banning all commercial banks ✓
4. D setting tariff rates for WTO ✓

Real interest rate approximately equals

1. A nominal rate plus CPI ✓
2. B nominal interest rate minus expected inflation ✓
3. C CRR minus SLR ✓
4. D exports minus imports ✓

Galloping inflation is

1. A very high and accelerating inflation, short of hyperinflation ✓
2. B stable 1% annual inflation ✓
3. C pure deflation ✓
4. D zero money growth ✓

Built-in (inertial) inflation persists due to

1. A a one-time oil shock only ✓
2. B a single bad harvest only ✓
3. C expectations and wage-price contracts that keep inflation going ✓
4. D a temporary tax cut only ✓

During recovery, capacity utilization typically

1. A falls to zero ✓
2. B equals the tariff rate ✓
3. C rises as firms use more of existing plant ✓
4. D replaces the money supply ✓

A coincident indicator moves

1. A only decades after recessions ✓
2. B independently of GDP always ✓
3. C roughly with current economic activity ✓
4. D only with foreign tariffs ✓

The sacrifice ratio in disinflation policy refers to

1. A the WTO accession fee ✓
2. B the CRR percentage only ✓
3. C the budget deficit ratio only ✓
4. D output/unemployment cost of reducing inflation ✓