Past Paper Questions/ Ch.3-Macroeconomic problems/p.

Inflation and Deflation

HKCEE questions
1993-42

1993-43

1994-38
Who will lose during an unanticipated inflation?
A. Mrs. Lee, who has hired a Filipino maid
B. Mr. Chan, who has bought ten coupons which can be exchanged for cakes at a bakery
C. Mr. Fu, who runs a restaurant
D. Mr. Wong, who has put all his money in his time deposit account

1995-33
Year 1994 1995
GDP deflator 120 132
Based on the above data, we may conclude that from 1994 to 1995, the economy’s
A.nominal GDP increased by 12%.
B. real GDP increased by 10%.
C. rate of deflation was 12%.
D. general price level increased by 10%.
 Past Paper Questions/ Ch.3-Macroeconomic problems/p.2

1996- 32
Study the following information about Country X:

Year Nominal national income ($mn) Price index

1996 8000 100
1989 10000 120
Comparing the year 1988 with 1989, we can conclude that

A. the cost of living increase by 20% in 1989.

B. The living standard in 1989 is generally higher.
C. The real GNP growth rate in 1989 is 25 %.
D. The price of all goods and services increase by 20% in 1989.

1997-25

The above graph shows that in the first half of 1996,

A. the high price of housing had led to a low consumption of the citizens.
B. the living standard of Hong Kong people had improved.
C. Hong Kong’s property market was on the upswing.
D. there was a lot of speculative activities in the property market of Hong Kong.
 Past Paper Questions/ Ch.3-Macroeconomic problems/p.3

1997-27

The above data reflects that during this period,

A. the consumption power of the people became weaker.
B. the economy was on a downswing.
C. the people consumed less but saved more.
D. the increase in the cost of living has slowed down.

1997-31
An increase in the GDP deflator from 100 to 110 in a certain year means that
A. every household’s cost of living has increased by 10%.
B. the general price level has increased by 10%.
C. the prices of all goods produced in the current year have increased by 10%.
D. people’s nominal incomes have increased by 10%.

1999-33
Study the figure below concerning the changes in the Consumer Price Index.
% Composite Consumer Price Index
6
5
(annual rate of increase)

4
3
2
1
0
1/98 2 3 4 5 6 7 8 9 10 Month /

year
From the figure, we can conclude that
A. inflation has stopped as prices go down.
B. wages have decreased.
C. the cost of living has been rising at a slower rate.
D. some debts who purchased mortgages on flats recently have suffered a loss.
 Past Paper Questions/ Ch.3-Macroeconomic problems/p.4

2000-36

Year GNP at current market prices GNP deflator

($ billion)
1997 2 100 105
1998 2 800 125

Based on the above information, the growth rate of real gross national product (real GNP) between 1997 and 1998 is

A. 12%
B. 16.3%
C. 33.3%
D. There is insufficient information to find the answer.

2000-39
Mr A borrows money from a bank for a housing mortgage at a fixed interest rate of 7% p.a. After that the
general price level falls continuously. In this event, Mr A loses and the bank gains. This is because
A. the value of the mortgaged house has been falling.
B. Mr A’s wage income has been falling.
C. the bank can sell the house if Mr A fails to repay the loan.
D. when the general price level keeps on falling, the purchasing power of a fixed amount of interest
will increase.
2001-31

Based on the data in Chart 1, under what situation would Mr Chan have gained from July 1999 to July 2000?
A. Before that period of time he had already borrowed a sum of money from a bank at a fixed
interest rate.
B. His salary remained unchanged during that period of time.
C. He adjusted the rental charge to his tenant in a rental property according to the change in price
level.
D. He had a collection of antique vases.
 Past Paper Questions/ Ch.3-Macroeconomic problems/p.5

2001-32
Refer to the following data about an economy.
Year 1 Year 2
GDP Deflator 150 180
We can conclude that from Year 1 to Year 2,
A. the purchasing power of money has decreased.
B. the real national income has decreased.
C. the average standard of living has gone down.
D. the income distribution has become more uneven.

2002-30

2003-28
 Past Paper Questions/ Ch.3-Macroeconomic problems/p.6

2003-29

2004-34

2005-33
Which of the following would gain when unexpected inflation occur?
A. holders of fixed deposits with banks
B. employees whose salaries are adjusted according to inflation
C. people who receive a fixed amount of unemployment benefits
D. a government which has issued bonds at fixed interest rates
 Past Paper Questions/ Ch.3-Macroeconomic problems/p.7

2005-34

2006-31
The Consumer Price Index (A) of Hong Kong in the third quarter of 2005 has increased. This means that
___________ in Hong Kong has increased.
A. the price of all goods
B. the price of imported goods
C. the nominal national income
D. the cost of living

2007-32
Year Nominal GDP Population Consumer Price
($billion) (million) Index
1 3 000 2 100
2 3 500 2.5 110
According to the above information, from Year 1 to Year 2, the economy’s real GDP has __________
and the per capita nominal GDP has ___________.
A. increased … decreased
B. increased … increased
C. decreased … decreased
D. decreased … increased
 Past Paper Questions/ Ch.3-Macroeconomic problems/p.8

2007-33
Which of the following statements about inflation is correct?
A. A continuous increase in the price of a good is not inflation.
B. During inflation, everyone suffers to the same extent.
C. During inflation, incomes and prices increase at the same rate.
D. Inflation may benefit some people, particularly those people whose incomes are fixed

2007-34
Refer to the following information about the composite consumer price index of Hong Kong.

Based on the above information, we can conclude that during this period in 2006,
A. the nominal GDP was falling.
B. the nominal GDP was increasing.
C. the purchasing power of money was falling.
D. the purchasing power of money was increasing.

2008-31
 Past Paper Questions/ Ch.3-Macroeconomic problems/p.9

2008-33

2009-33

2009-34
 Past Paper Questions/ Ch.3-Macroeconomic problems/p.10

HKAL questions
1990-11
Which of the following statements about inflation are correct?

(1) Inflation can exist in a barter economy.

(2) In times of inflation, income will be redistributed from the general public to the government.
(3) The nominal interest rate will be greater than the real interest rate when inflation is fully anticipated.
(4) Inflation can be eliminated by price control.

A. (1) and (3) only

B. (1) and (4) only
C. (2) and (3) only
D. (2) and (4) only

1990-24
The inflation rate and the real interest rate were expected to be 5% and 4% respectively. In reality, the actual
inflation rate turned out to be 7%. What was the real interest rate?

A. 1%
B. 2%
C. 3%
D. 9%

1991-26
Which of the following types of people are likely to benefit most from a period of unanticipated inflation,
assuming that the composition of their assets and liabilities remains unchanged?

A. Pension owners with saving accounts, who have no liabilities.

B. Those who have common stocks and houses, and whose only liability is a mortgage.
C. Those who own government bonds and a paid-up life insurance policy, and who have no liabilities.
D. Those who own government bonds and houses, and whose only liability is a mortgage.

1992-21
If the nominal rate of interest is 10% but the real rate of interest is only 6%, the real return on holding cash
will be

A. 0%.
B. -4%.
C. -6%.
D. -10%.

1992-23
The consumer price index tends to overstate the inflation rate because

(1) it uses a fixed basket of goods.

(2) it assumes the quality of goods remains unchanged.
(3) it only includes final goods.

A. (1) and (2) only

B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)
 Past Paper Questions/ Ch.3-Macroeconomic problems/p.11

1993-20
If the timing, rate and duration of an inflation can be fully anticipated, which of the following will occur?

A. There will be no wealth distributive effect.

B. The inflation can be avoided.
C. Transaction costs will increase.
D. The real interest rate will equal to the nominal interest rate.

1993-29
If the sum of the real interest rate and the anticipated inflation rate is greater than the nominal interest rate,
which of the following will be FALSE?

A. Nobody likes to lend money to others.

B. People want to borrow money for consumption.
C. People want to make investments themselves.
D. The anticipation inflation rate will fall.

1994-23
Which of the following is a problem when price indexes are used as an indicator of the inflation rate?

A. The substitution of low-priced goods for high-priced goods is not considered.

B. The sample basket of chosen goods may not be a representative one.
C. The improvement in the quality of the goods is not fully reflected.
D. All of the above.

1994-24
Inflation will occur when

A. the government carries out expansionary policies.

B. the growth rate of money is grater than the growth rate of real output.
C. the income of the economy grows.
D. the prices of some of the goods start to rise.

1995-13
Which of the following statements about money are correct?

(1) Inflation cannot sustain without increase in the money supply.

(2) Anything that has intrinsic value can serve as money.
(3) The use of money solves the problem of double coincidence of wants.

A. (1) and (2) only

B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

1995-19
If the inflation rate falls and remains positive,

A. the economy is experiencing unemployment.

B. the price level is falling at a fixed rate.
C. the price level increases and then decreases.
D. the price level is rising.
 Past Paper Questions/ Ch.3-Macroeconomic problems/p.12

1995-20
Unanticipated inflation will result in

(1) transfer of wealth.

(2) misallocation of resources.
(3) higher rates of interest.

A. (1) and (2) only

B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

1996-21
When inflation occurs, the opportunity cost of holding money is equal to

A. the nominal rate of interest.

B. the expected rate of inflation.
C. the actual rate of inflation.
D. None of the above.

1996-27
If inflation is unanticipated, which of the following statements are correct?

(1) Wealth will be redistributed from creditors to debtors.

(2) Fixed income earners will suffer.
(3) People will transform all their monetary assets into real assets.

A. (1) and (2) only.

B. (1) and (3) only.
C. (2) and (3) only.
D. (1), (2) and (3)

1997-11
When nominal wages rise faster than prices under a proportional income tax system, real wages will _____
and workers will _____.

A. rise ... worse off

B. rise ... better off
C. fall ... worse off
D. fall ... better off

1997-23
The defects of using the consumer price index in measuring inflation are:

(1) Changes in the quality of goods are not considered.

(2) It is assumed that consumers spend their income equally on all goods.
(3) The fact that people will substitute relatively lower-priced goods for higher-priced goods when prices
change is not considered.

A. (1) and (2) only

B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)
 Past Paper Questions/ Ch.3-Macroeconomic problems/p.13

1997-28
Suppose over a period of one year, nominal GDP, population and the price level increase by 5%, 2% and 6%
respectively. Which of the following is correct?

A. The per capita nominal GDP increases but the per capita real GDP decreases.
B. The per capita nominal GDP decreases but the per capita real GDP increases.
C. Both the per capita nominal GDP and the per capita real GDP increases.
D. Both the per capita nominal GDP and the per capita real GDP decreases.

1998-09
Which of the following statements about the cost of inflation are correct?

(1) Inflation leads to inefficient use of resources because resources are used to cope with it.
(2) Even inflation is fully anticipated, there is still a cost of inflation.
(3) When the rate of inflation cannot be correctly anticipated, investors are reluctant to enter into long term
contracts, leading to the abandonment of some production opportunities.

A. (1) and (2) only

B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

1998-26
A rise in the consumer price index implies

A. a rise in the price of every commodity involved in the calculation of the index.
B. a fall in the standard of living.
C. a fall in real wages.
D. a rise in the cost of living.

1999-17
The inflation rate in an economy was 10% in 1996 and dropped to 5% in 1997. Which of the following must
be true about the economy in the above period?

A. There was a fall in the standard of living.

B. There was deflation in the year 1997.
C. There was a rise in the prices of all goods.
D. None of the above.

1999-18
The expected inflation rate and the real rate of interest rate are 10% and 4% respectively. If the actual
inflation rate turns out to be 9% only, the cost of holding cash is _____ and the real rate of return on holding
cash is _____.

A. 4% ... -5%
B. 4% ... -9%
C. 14% ... -9%
D. 14% ... -10%
 Past Paper Questions/ Ch.3-Macroeconomic problems/p.14

1999-30
Which of the following is NOT a problem in using the consumer price index as an indicator of the inflation
rate?

A. It uses a fixed basket of goods.

B. It assumes the quality of goods remains unchanged.
C. It includes only final goods.
D. It includes imported goods.

2001-15
Suppose the GNP at current market prices and the GNP at constant market prices of an economy increase by
the same percentage. This means that

A. real output increases but price level remains unchanged.

B. both price level and real output increase by the same percentage.
C. price level rises at a greater percentage than real output.
D. price level rises but real output remains unchanged.

2001-25
Consider the following information on an economy:

Nominal GNP Growth Rate -3%

Real GNP Growth Rate -4%
Per Capita Nominal GNP Growth Rate -5%

The above table shows that there is a _____ in price level and a/an _____ in production.

A. rise ... increase

B. rise ... decrease
C. fall ... increase
D. fall ... decrease

2002-18
Under wage indexation with the wage rate adjusted in the same proportion as the inflation rate,

A. inflation rate can be maintained at a low level.

B. there will be no change in real wage.
C. the real wage and nominal wage will increase at the same time.
D. workers will be better off.

2002-22
The nominal interest rate and the expected inflation rate are 10% and 7% respectively. If the actual inflation
rate returns out to be 12%, then the realized real rate of interest will be _____ and the real rate of return on
holding cash will be _____.

A. -2% ... -12%

B. -2% ... -10%
C. 3% ... -12%
D. 3% ... -10%
 Past Paper Questions/ Ch.3-Macroeconomic problems/p.15

2003-20
The deflation rate of an economy was 6% in 2001 and increased to 8% in 2002. Which of the following must
be true about the economy in the above period?

A. There was a fall in the prices of all goods.

B. There was a fall in the standard of living.
C. The monetary authority tightened the money supply.
D. None of the above.

2003-21
The real rate of return on holding non-interest-earning cash is positive if

A. the rate of inflation is falling.

B. the interest rate is falling.
C. prices are falling.
D. the velocity of circulation of money is falling.

2004-15
Disinflation means that

A. the inflation rate is at a disequilibrium level.

B. inflation destabilizes the economy.
C. the deflation rate is rising.
D. the price level is increasing at a slower rate.

2004-17
Inclusive of the principal, the real interest rate is the relative price between _____ and _____.

A. good today ... goods tomorrow

B. good today ... money tomorrow
C. money today ... goods tomorrow
D. money today ... money tomorrow

2004-18
Suppose individuals can only choose to hold bonds or cash. The cost of holding cash is

A. the real interest rate because the return from holding bonds will not be affected by a change in the price
level.
B. the real interest rate because it reflects the rate of return from investment.
C. the nominal interest rate because it is the return from bonds.
D. the nominal interest rate only when inflation rate can be accurately anticipated.

2005-22
When there is deflation,

A. the real interest rate will be negative.

B. the nominal interest rate will be negative.
C. the real interest rate will be higher than the nominal interest rate.
D. All of the above.
 Past Paper Questions/ Ch.3-Macroeconomic problems/p.16

2006-08
If the nominal interest rate on one-year bond is 8% and the expected inflation rate is 3%, the nominal rate of
return and the expected real rate of return of holding money are _____ and _____ respectively.

A. 0% ... -3%
B. 0% ... -5%
C. -8% ... -3%
D. -8% ... -5%

2006-21
The real interest rate will be higher than the nominal interest rate if

A. the actual inflation rate is lower than the expected inflation rate.
B. the expected inflation rate is falling.
C. the nominal interest rate is falling.
D. the price level is expected to fall.

2007-22
The Consumer Price Index (CPI) may overstate the actual increase in the cost of living during periods of
inflation because

(1) consumption pattern may change when the relative prices of goods change.
(2) the quality of goods and services may improve over time.
(3) the weights assigned to different goods in the calculation of the CPI are fixed.

A. (1 and (2) only

B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

2008-23

2009-20

2009-21
 Past Paper Questions/ Ch.3-Macroeconomic problems/p.17

2010-19

2010-20

HKDSE
SP-28

PP-30

PP-31

PP-35
 Past Paper Questions/ Ch.3-Macroeconomic problems/p.18

Chapter 3:
Past Paper Questions
Suggested Solutions

Inflation and Deflation –HKCEE Questions

1993-42 C 1993-43 D 1994-38 D
1995-33 D 1996- 32 A 1997-25 C
1997-27 D 1997-31 B 1999-33 C
2000-36 A 2000-39 D 2001-31 B
2001-32 A 2002-30 C 2003-28 B
2003-29 D 2004-34 A 2005-33 D
2005-34 D 2006-31 D 2007-32 A
2007-33 A 2007-34 C 2008-31 C
2008-33 C 2009-33 A 2009-34 B
Inflation and Deflation –HKAL Questions
1990-11 C 1990-24 B 1991-26 B
1992-21 B 1992-23 A 1993-20 A
1993-28 A 1993-29 D 1994-23 D
1994-24 B 1995-13 B 1995-19 D
1995-20 A 1996-21 A 1996-27 A
1997-11 B 1997-23 B 1997-28 A
1998-09 D 1998-26 D 1999-17 D
1999-18 C 1999-30 D 2001-15 A
2001-25 A 2002-18 B(82) 2002-22 A(47)
2003-20 D 2003-21 C 2004-15 D(71)
2004-17 A(50) 2004-18 C(53) 2005-22 C(73)
2006-08 A(26) 2006-21 D(50) 2007-22 D(61)
2008-23 C(33) 2009-20 D(75) 2009-21 D(71)
2010-19 B(61) 2010-20 A(46)
Inflation and Deflation –HKDSE Questions
SP-28 B PP-30 B PP-31 A
PP-35 A
Past Paper Questions/ Ch.3-Macroeconomic problems/p.19