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Consider the following statements.
1. Higher inflation indicates higher demand and suggests entrepreneurs expand their production level.
2. Higher the inflation, the higher the cost of the loan.
Which of these statements is/are correct?
- a)2 Only
- b)Both 1 and 2
- c)1 Only
- d)None of them
Correct answer is option 'B'. Can you explain this answer?
Most Upvoted Answer
Consider the following statements.1. Higher inflation indicates higher...
Explanation:
Statement 1: Higher inflation indicates higher demand and suggests entrepreneurs expand their production level.
• Inflation is a general increase in the price level of goods and services in an economy over a period of time.
• It can be caused by demand-pull factors such as increased consumer demand or cost-push factors such as rising production costs.
• When inflation is caused by increased demand, it indicates that people have more money to spend on goods and services. This, in turn, suggests that entrepreneurs can expand their production level to meet the increased demand.
• Therefore, statement 1 is correct.
Statement 2: Higher the inflation, the higher the cost of the loan.
• Inflation can affect the cost of loans in two ways- through the nominal interest rate and the real interest rate.
• Nominal interest rate is the interest rate that is quoted by lenders and paid by borrowers. It is the rate at which money actually grows.
• Real interest rate is the nominal interest rate adjusted for inflation. It is the rate at which the purchasing power of money grows.
• When inflation is high, lenders tend to charge a higher nominal interest rate to compensate for the loss of purchasing power of the money they lend.
• Therefore, statement 2 is also correct.
Hence, the correct answer is option B.
Statement 1: Higher inflation indicates higher demand and suggests entrepreneurs expand their production level.
• Inflation is a general increase in the price level of goods and services in an economy over a period of time.
• It can be caused by demand-pull factors such as increased consumer demand or cost-push factors such as rising production costs.
• When inflation is caused by increased demand, it indicates that people have more money to spend on goods and services. This, in turn, suggests that entrepreneurs can expand their production level to meet the increased demand.
• Therefore, statement 1 is correct.
Statement 2: Higher the inflation, the higher the cost of the loan.
• Inflation can affect the cost of loans in two ways- through the nominal interest rate and the real interest rate.
• Nominal interest rate is the interest rate that is quoted by lenders and paid by borrowers. It is the rate at which money actually grows.
• Real interest rate is the nominal interest rate adjusted for inflation. It is the rate at which the purchasing power of money grows.
• When inflation is high, lenders tend to charge a higher nominal interest rate to compensate for the loss of purchasing power of the money they lend.
• Therefore, statement 2 is also correct.
Hence, the correct answer is option B.
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Consider the following statements.1. Higher inflation indicates higher...
Rising inflation indicates rising aggregate demand and indicates comparatively lower supply and higher purchasing capacity among the consumers. Usually, higher inflation suggests the producers to increase their production level as it is generally considered as an indication of higher demand in the economy. Higher inflation indicates higher demand and suggests entrepreneurs to expand their production level and Higher the inflation, lower the cost of loan.
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Consider the following statements.1. Higher inflation indicates higher demand and suggests entrepreneurs expand their production level.2. Higher the inflation, the higher the cost of the loan.Which of these statements is/are correct?a)2 Onlyb)Both 1 and 2c)1 Onlyd)None of themCorrect answer is option 'B'. Can you explain this answer?
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