Inflation and Deflation Quiz

Causes of Inflation

• Increased demand for goods and services can lead to inflation through higher prices.
• Rising production costs, such as wages and raw materials, contribute to inflationary pressures.
• Expansionary monetary policy by central banks, such as lowering interest rates, can result in increased money supply and inflation.

Characteristics of Deflation

• Declining prices lead to reduced consumer spending as consumers anticipate further price drops.
• Increased real value of debt, making it more burdensome for borrowers during deflationary periods.
• Economic stagnation often accompanies deflation, as businesses may reduce production and investment.

Consumer Price Index (CPI)

• The CPI measures the average change over time in the prices paid by consumers for a basket of goods and services.
• It is used as an economic indicator to gauge inflation and inform monetary policy decisions.
• The CPI affects cost-of-living adjustments for wages, pensions, and government benefits.

Normal Year

• A normal year is typically defined as a standard period for economic analysis, free from anomalies or significant fluctuations.
• It serves as a benchmark for comparing economic performance and activity.

Hard Currency

• Hard currency is a stable and widely accepted currency, often used in international transactions.
• It typically has a strong backing by economic fundamentals, such as low inflation and high demand.
• Examples include the US Dollar, Euro, and Swiss Franc, which are trusted during times of economic uncertainty.