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Which of the following is an effect of inflation?
- a)Erosion in purchasing power
- b)Affects relative price of goods
- c)Increase in inequalities of income
- d)All the above
Correct answer is option 'D'. Can you explain this answer?
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Which of the following is an effect of inflation?a)Erosion in purchasi...
As a result of inflation, some sections like producers or big landlords gain due to the ownership of assets, income inequality increases.
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Which of the following is an effect of inflation?a)Erosion in purchasi...
Effects of Inflation
Inflation, defined as the general increase in prices of goods and services over time, has several significant effects on the economy. Here’s a detailed look at the options provided.
Erosion in Purchasing Power
- Inflation directly reduces the purchasing power of money.
- As prices rise, consumers can buy less with the same amount of money, leading to a decline in their standard of living.
- For example, if inflation is at 5%, a product that costs $100 today would cost $105 next year.
Affects Relative Price of Goods
- Inflation can distort relative prices among various goods and services.
- Not all prices rise at the same rate; some may increase faster than others, leading to changes in consumer behavior.
- This can cause inefficiencies in the market as resources may be misallocated based on perceived value rather than actual value.
Increase in Inequalities of Income
- Inflation can exacerbate income inequality.
- Those with fixed incomes, like retirees, may struggle as their purchasing power diminishes, while individuals with assets that appreciate with inflation may benefit.
- Additionally, wage increases may not always keep pace with inflation, further widening the gap between high and low earners.
Conclusion
- Given these effects, it is clear that inflation has far-reaching consequences.
- The correct answer is indeed option 'D' – all of the above impacts are valid and demonstrate how inflation influences economic dynamics comprehensively.
Inflation, defined as the general increase in prices of goods and services over time, has several significant effects on the economy. Here’s a detailed look at the options provided.
Erosion in Purchasing Power
- Inflation directly reduces the purchasing power of money.
- As prices rise, consumers can buy less with the same amount of money, leading to a decline in their standard of living.
- For example, if inflation is at 5%, a product that costs $100 today would cost $105 next year.
Affects Relative Price of Goods
- Inflation can distort relative prices among various goods and services.
- Not all prices rise at the same rate; some may increase faster than others, leading to changes in consumer behavior.
- This can cause inefficiencies in the market as resources may be misallocated based on perceived value rather than actual value.
Increase in Inequalities of Income
- Inflation can exacerbate income inequality.
- Those with fixed incomes, like retirees, may struggle as their purchasing power diminishes, while individuals with assets that appreciate with inflation may benefit.
- Additionally, wage increases may not always keep pace with inflation, further widening the gap between high and low earners.
Conclusion
- Given these effects, it is clear that inflation has far-reaching consequences.
- The correct answer is indeed option 'D' – all of the above impacts are valid and demonstrate how inflation influences economic dynamics comprehensively.
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Which of the following is an effect of inflation?a)Erosion in purchasing powerb)Affects relative price of goodsc)Increase in inequalities of incomed)All the aboveCorrect answer is option 'D'. Can you explain this answer?
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