Chapter 2, Problem 4MCQ

To determine

The question requires us to identify the factor which is most likely the result of inflation.

Explanation of Solution

The given options:

• Falling employment and low aggregate per capita output are the outcomes of a recession in the economy. 
• Price stability simply means no fluctuations in the price level of goods and services. It means there is neither inflation nor deflation in the market.
• During the appreciation period, the value of a dollar will rise which means a dollar can purchase more quantity of goods and services now. 

An increase in the general price level of goods and services is termed inflation in an economy, for example, suppose in period 1, a person is purchasing a basket of goods at $100 per basket. Later, in period 2, the person buys the same basket of goods at $120 then this hike in the price of the basket represents the inflation in the market.

Inflation reduces the purchasing power of money because initially, the consumer was purchasing more goods at a lower cost, but now he is purchasing the same quantity of goods by paying more. Sometimes, inflation is also considered a hidden tax in the economy because even if a person is not using it and just holding it in form of cash, its purchasing capacity is falling during the inflationary period.

So, inflation discourages people from holding cash in their hands.