Chartered Financial Analyst (CFA) Level 1 Practice Exam 2025 - Free CFA Level 1 Practice Questions and Study Guide

A high inflation rate typically indicates that the economy may be overheating. When inflation is high, it often suggests that there is strong demand for goods and services outpacing supply, which can lead to increased prices. This scenario often arises in an economy that is growing rapidly, possibly beyond its long-term capacity. Overheating can result from various factors such as excessive consumer spending, increased government spending, or expansionary monetary policies that drive up demand.

In contrast, options like stability of the economy, appreciation of currency, or a balanced government budget do not correlate directly with high inflation. A stable economy typically exhibits low and controlled inflation rates. Similarly, a high inflation rate usually erodes the purchasing power of currency, indicating depreciation rather than appreciation. Furthermore, a balanced government budget is not directly linked to inflation levels; it refers to the relationship between government spending and revenue, which can exist independently of inflation rates. Thus, the presence of high inflation is a strong indicator that the economy might be overheating.