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What is the effect of inflation on the expenditure?


1. Increased prices make our consumption levels fall as goods and services we buy get costlier.


2. Inflation makes investment expenditure decrease as a result of the increased cost of money.


Which of these statements is/are correct?

  • a)
    1 and 2 Only

  • b)
    1 Only

  • c)
    2 Only

  • d)
    None of these

Correct answer is option 'A'. Can you explain this answer?
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Most Upvoted Answer
What is the effect of inflation on the expenditure?1. Increased prices...
Both statements are correct.




  1. When inflation occurs, the prices of goods and services increase, and people need to spend more money to buy the same quantity of goods and services as before. This means that the purchasing power of their income decreases, which ultimately leads to a decrease in consumption levels.



  2. Inflation also increases the cost of borrowing money, which means that the interest rates on loans increase. As a result, people and businesses tend to decrease their investment expenditure as the cost of borrowing money becomes too high.




Therefore, both statements correctly describe the effects of inflation on expenditure.


 


 


 


 


 
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Community Answer
What is the effect of inflation on the expenditure?1. Increased prices...
Effect of Inflation on Expenditure:

1. Increased prices make our consumption levels fall as goods and services we buy get costlier:
When inflation occurs, the general price level of goods and services in an economy increases. This means that the purchasing power of individuals decreases as they need to spend more money to purchase the same quantity of goods and services. As a result, the expenditure on consumption decreases. This happens because inflation erodes the value of money and reduces the real income of individuals. People tend to cut back on their spending or choose cheaper alternatives, leading to a decrease in consumption levels. Therefore, statement 1 is correct.

2. Inflation makes investment expenditure decrease as a result of the increased cost of money:
Inflation leads to an increase in the cost of borrowing money. When prices rise, the nominal interest rates also increase to compensate for the loss of purchasing power. This means that individuals and businesses have to pay higher interest rates on loans and investments. As a result, the cost of borrowing money increases, making it less attractive for individuals and businesses to invest. Higher borrowing costs can discourage investment expenditure and lead to a decrease in overall investment levels. Therefore, statement 2 is correct.

Conclusion:
Both statements 1 and 2 are correct. Inflation has a negative impact on expenditure, both in terms of consumption and investment. The increased prices reduce the purchasing power of individuals, leading to a decline in consumption levels. Additionally, the higher cost of borrowing money due to inflation discourages investment expenditure. These effects of inflation can have significant implications for the overall economic growth and stability of an economy.
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In a poor country like India, as income rises people first concentrate on increasing their consumption of what they regard as basic or more essential consumer goods. For the poor, these goods would primarily include cereals and for people at successive levels of higher income protective foods, simple non-food consumer goods, more modern, better quality non-food consumer goods and simple consumer durables, better quality consumer goods, and so on. When the demand for basic and more essential consumer goods is more or less met, demand for the next higher level of consumer goods begins to impinge on consumer decision making and their consumption increases. There is thus a hierarchy of income levels and a hierarchy of consumer goods. As incomes rise and one approaches the turning point referred to, there is an upward movement along the hierarchy in the demand for consumer goods which exhibits itself in a relative increase in the demand for these goods. If one examines the past consumption behaviour of households in India, one finds confirmation of the proposition just made. Until the mid seventies one notices a rise in the proportion of consumption expenditure on cereals, and thereafter, a steady decline reflecting a progressive increase in the relative expenditure on non-cereal or protective foods. About the same time the rising trend in the share of food in total consumption expenditure also begins to decline, raising the proportion of expenditure on non-food consumer goods. Simultaneously one also notices a sharper rise in the proportion of expenditure on consumer durables. Thus, what one sees is an upward movement in consumer demand along the hierarchy of consumer goods which amounts to a major change in consumer behaviour.Whenever there is a decline in the proportion of consumption expenditure on cereals

In a poor country like India, as income rises people first concentrate on increasing their consumption of what they regard as basic or more essential consumer goods. For the poor, these goods would primarily include cereals and for people at successive levels of higher income protective foods, simple non-food consumer goods, more modern, better quality non-food consumer goods and simple consumer durables, better quality consumer goods, and so on. When the demand for basic and more essential consumer goods is more or less met, demand for the next higher level of consumer goods begins to impinge on consumer decision making and their consumption increases. There is thus a hierarchy of income levels and a hierarchy of consumer goods. As incomes rise and one approaches the turning point referred to, there is an upward movement along the hierarchy in the demand for consumer goods which exhibits itself in a relative increase in the demand for these goods. If one examines the past consumption behaviour of households in India, one finds confirmation of the proposition just made. Until the mid seventies one notices a rise in the proportion of consumption expenditure on cereals, and thereafter, a steady decline reflecting a progressive increase in the relative expenditure on non-cereal or protective foods. About the same time the rising trend in the share of food in total consumption expenditure also begins to decline, raising the proportion of expenditure on non-food consumer goods. Simultaneously one also notices a sharper rise in the proportion of expenditure on consumer durables. Thus, what one sees is an upward movement in consumer demand along the hierarchy of consumer goods which amounts to a major change in consumer behaviour.As income rises in a poor country like India, the poor people concentrate on increasing their consumption of

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What is the effect of inflation on the expenditure?1. Increased prices make our consumption levels fall as goods and services we buy get costlier.2. Inflation makes investment expenditure decrease as a result of the increased cost of money.Which of these statements is/are correct?a)1 and 2 Onlyb)1 Onlyc)2 Onlyd)None of theseCorrect answer is option 'A'. Can you explain this answer?
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