Inflation: Causes and Effects
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Questions and Answers

What is inflation in the context of economics?

  • A stable price level of goods and services over time
  • A sudden change in the general price level of goods and services
  • A sustained increase in the general price level of goods and services (correct)
  • A sustained decrease in the general price level of goods and services

    • What happens when the overall price level rises?

  • Each unit of currency buys fewer goods and services (correct)
  • Each unit of currency becomes worthless
  • Each unit of currency buys more goods and services
  • Each unit of currency buys the same amount of goods and services

    • What is the usual measure of inflation?

  • Gross Domestic Product (GDP) growth rate
  • Percentage increase in the Consumer Price Index (CPI) (correct)
  • Unemployment rate
  • Interest rate

    • What is demand-pull inflation caused by?

    <p>An excess of aggregate demand over supply</p> Signup and view all the answers

    What is an example of a scenario that could lead to demand-pull inflation?

    <p>An increase in government spending or a decrease in taxes</p> Signup and view all the answers

    What is cost-push inflation caused by?

    <p>An increase in the cost of production</p> Signup and view all the answers

    What is a consequence of a sustained increase in the general price level of goods and services?

    <p>The purchasing power of each unit of currency decreases</p> Signup and view all the answers

    What is a common characteristic of both demand-pull and cost-push inflation?

    <p>They both result in higher prices</p> Signup and view all the answers

    Which of the following is NOT a direct cause of demand-pull inflation?

    <p>Rise in oil prices</p> Signup and view all the answers

    What is a potential consequence of cost-push inflation?

    <p>Businesses pass on the increased costs to consumers</p> Signup and view all the answers

    What is the name of the index used to measure the rate of inflation?

    <p>Consumer Price Index (CPI)</p> Signup and view all the answers

    When does demand-pull inflation occur?

    <p>When aggregate demand exceeds aggregate supply</p> Signup and view all the answers

    What is an example of a scenario that could lead to cost-push inflation?

    <p>A rise in oil prices</p> Signup and view all the answers

    Study Notes

    Inflation

    • Sustained increase in the general price level of goods and services in an economy over a period of time
    • Each unit of currency buys fewer goods and services when the overall price level rises
    • Measured as a percentage increase in the Consumer Price Index (CPI) over a given period (e.g., annually or monthly)

    Causes of Inflation

    Demand-Pull Inflation

    • Occurs when aggregate demand for goods and services exceeds aggregate supply
    • Excess demand leads to higher prices as suppliers increase prices to balance the demand-supply gap
    • Examples:
      • Government increases public spending
      • Government lowers taxes, resulting in people having more money to spend

    Cost-Push Inflation

    • Results from an increase in the cost of production for businesses
    • Businesses pass on increased costs to consumers in the form of higher prices
    • Examples:
      • Rise in oil prices, increasing the cost of production for goods that rely on oil

    Inflation

    • Sustained increase in the general price level of goods and services in an economy over a period of time
    • Each unit of currency buys fewer goods and services when the overall price level rises
    • Measured as a percentage increase in the Consumer Price Index (CPI) over a given period (e.g., annually or monthly)

    Causes of Inflation

    Demand-Pull Inflation

    • Occurs when aggregate demand for goods and services exceeds aggregate supply
    • Excess demand leads to higher prices as suppliers increase prices to balance the demand-supply gap
    • Examples:
      • Government increases public spending
      • Government lowers taxes, resulting in people having more money to spend

    Cost-Push Inflation

    • Results from an increase in the cost of production for businesses
    • Businesses pass on increased costs to consumers in the form of higher prices
    • Examples:
      • Rise in oil prices, increasing the cost of production for goods that rely on oil

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    Description

    Understand the concept of inflation, its causes, and effects on the economy. Learn about demand-pull and cost-push inflation, and how it's measured.

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