Inflation And Stagflation Question Answers

Deflation is the opposite of inflation. While inflation refers to a general increase in prices and decrease in the purchasing power of money, deflation is characterized by a sustained decrease in prices, leading to an increase in the value of money. During deflation, the overall demand for goods and services decreases, causing businesses to reduce prices to stimulate spending. This can have negative effects on the economy, such as reduced investment and increased unemployment. Therefore, deflation is the correct answer as it represents the opposite trend to inflation.

Stagflation is the correct answer because it refers to a situation in which there is a combination of high inflation and high unemployment or economic stagnation. This term is used to describe an economy that is experiencing both inflationary pressures and a lack of economic growth or high unemployment rates. It is a unique and challenging economic phenomenon that can be difficult to address and manage effectively.

When too much money is chasing too few goods, it leads to an increase in demand for goods and services, causing prices to rise. This is known as demand-pull inflation. As the demand for goods exceeds the supply, producers are able to increase prices, resulting in inflationary pressure. This scenario is often seen in periods of economic growth or when there is excessive money supply in the economy. Cost-push inflation, on the other hand, occurs when the cost of production increases, leading to higher prices. Deflation refers to a general decrease in prices.

The business class is less likely to suffer from an increase in prices compared to the other categories mentioned. This is because the business class generally has higher income levels and more financial resources to absorb price increases. They may also have the ability to pass on the increased costs to consumers through higher prices for their products or services. Additionally, the business class may have access to various strategies and resources to mitigate the impact of price increases, such as cost-cutting measures or alternative sourcing options.

A deflationary gap exists when the actual level of Real GDP is less than the potential level of Real GDP. This means that the economy is producing below its full capacity and there is a shortfall in aggregate demand. In this situation, there is likely to be high unemployment as businesses are not operating at full capacity and are not hiring enough workers. To close the deflationary gap, the government may need to implement expansionary fiscal or monetary policies to stimulate aggregate demand and increase economic output.

Devaluation refers to the deliberate reduction in the value of a currency by the central government in relation to the international exchange rate. This can be done to boost exports, make imports more expensive, or address a trade imbalance. Depreciation, on the other hand, refers to a decrease in the value of a currency due to market forces. Inflation is a general increase in prices, and deflation is a decrease in prices. Therefore, devaluation is the correct term to describe the reduction in a currency's value by the central government.

When the government cuts its spending, it reduces the amount of money flowing into the economy. This decrease in government expenditure can help to lower inflation because there is less demand for goods and services. When there is less demand, prices tend to decrease as well. Therefore, cuts in government spending can be an effective tool used by the government to lower inflation.

The purchasing power of money is inversely proportional to the price level. This means that as the price level increases, the purchasing power of money decreases, and vice versa. In other words, when prices go up, it takes more money to buy the same amount of goods and services, reducing the value of each unit of currency. On the other hand, when prices decrease, the purchasing power of money increases, allowing individuals to buy more with the same amount of money.

High inflation level leads to an increase in the money supply. When there is high inflation, the prices of goods and services increase. To keep up with the rising prices, the central bank may increase the money supply by printing more money or lowering interest rates. This increased money supply leads to more money circulating in the economy, which can contribute to further inflation. Therefore, high inflation often results in an increase in the money supply.

An inflationary gap exists when the actual output of an economy, represented by Real GDP, exceeds its potential output, represented by Potential GDP. This situation indicates that the economy is operating beyond its maximum sustainable level, leading to increased demand for goods and services. As a result, prices tend to rise, leading to inflationary pressures.