Inflation implies that the level of all prices __.
A. decrease.
B. stay the same
C. increase
D. none of the above
The correct answer and explanation is:
The correct answer is C. increase.
Explanation:
Inflation refers to the general increase in the prices of goods and services within an economy over a period of time. As inflation rises, each unit of currency buys fewer goods and services. This decrease in purchasing power occurs because the cost of living, which includes everything from food and housing to medical care and education, becomes more expensive. Inflation is typically measured by indices such as the Consumer Price Index (CPI), which tracks the average price changes for a basket of goods and services consumed by households.
There are various factors that can lead to inflation. One of the most common is demand-pull inflation, which occurs when there is an increase in aggregate demand (the total demand for goods and services in the economy) that outpaces supply. This increased demand drives prices up, as businesses struggle to meet the higher demand. Another common cause is cost-push inflation, which happens when the costs of production (such as labor, raw materials, or energy) rise, causing businesses to increase prices to maintain profit margins.
Inflation is a complex economic phenomenon and does not affect all goods and services equally. Some sectors may experience higher inflation, while others may see more stable prices. However, in general, inflation erodes the purchasing power of money, meaning people can buy less with the same amount of currency. While moderate inflation is a normal part of a growing economy, excessive inflation (often referred to as hyperinflation) can lead to severe economic instability, as seen in countries like Zimbabwe or Venezuela.
In summary, inflation means that the level of all prices increases, which is why the correct answer is C. increase.