Association of Chartered Certified Accountants (ACCA) Certification Practice Test

Which describes expectational inflation?

1. Inflation due to actual cost increases in production

2. Inflation driven by expectations of future inflation

3. Inflation due to shortages of raw materials

4. Inflation caused by excessive money supply growth

The correct answer is: Inflation driven by expectations of future inflation

Expectational inflation refers to the phenomenon where inflation is influenced by the public's expectations regarding future inflation rates. When individuals, businesses, and investors anticipate that prices will rise in the future, they may act in ways that contribute to actual inflation. For instance, workers might demand higher wages to keep up with expected price increases, and businesses might preemptively raise prices in anticipation of higher costs. This creates a self-fulfilling cycle where the expectation of inflation leads to behaviors that actually drive inflation forward. The other options describe various triggers of inflation but do not capture the essence of expectational inflation. Actual cost increases relate more to cost-push inflation, shortages of raw materials can lead to supply chain issues, and excessive money supply growth typically reflects demand-pull inflation phenomena rather than expectations influencing inflation rates. Thus, the focus on expectations in option B makes it the correct choice when discussing expectational inflation.