Causes & Effects of Inflation/Deflation - SS2 Economics Past Questions and Answers - page 1
What is inflation?
A decrease in the general level of prices for goods and services over time
An increase in the general level of prices for goods and services over time
No change in the general level of prices for goods and services over time
What can cause inflation?
An increase in production costs
A decrease in demand for goods and services
A decrease in the money supply
(Inflation decreases the value of money, meaning that the same amount of money can buy fewer goods and services)
What is deflation?
An increase in the general level of prices for goods and services over time
A decrease in the general level of prices for goods and services over time
No change in the general level of prices for goods and services over time
What can cause deflation?
An increase in demand for goods and services
An increase in the money supply
A decrease in the supply of goods and services
(When the demand for goods and services decreases, prices tend to decrease. This is because a decrease in demand will lead producers to lower prices with the hope of attracting consumers to purchase their goods and services)
What is the impact of inflation on the purchasing power of money?
It increases the purchasing power of money
It decreases the purchasing power of money
It has no impact on the purchasing power of money
(It decreases the purchasing power of money. This means that the amount of money formerly needed to purchase a good or service has increased. Thus, the consumer will purchase less of that good and service)
List one factor that can cause inflation.
Expansionary monetary policy can cause inflation.
What is the impact of deflation on debtors?
Deflation can increase the burden of debt because the value of money increases, making it harder for debtors to repay loans.