Causes & Effects of Inflation/Deflation - SS2 Economics Past Questions & Answers - page 1

1

What is inflation?

A

A decrease in the general level of prices for goods and services over time

B

An increase in the general level of prices for goods and services over time

C

No change in the general level of prices for goods and services over time

CORRECT OPTION: b
2

What can cause inflation?

A

An increase in production costs

B

A decrease in demand for goods and services

C

A decrease in the money supply

CORRECT OPTION: c

(Inflation decreases the value of money, meaning that the same amount of money can buy fewer goods and services)

3

What is deflation?

A

An increase in the general level of prices for goods and services over time

B

A decrease in the general level of prices for goods and services over time

 

C

No change in the general level of prices for goods and services over time

CORRECT OPTION: b
4

What can cause deflation?

A

An increase in demand for goods and services

B

An increase in the money supply

C

A decrease in the supply of goods and services

CORRECT OPTION: c

(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)

5

What is the impact of inflation on the purchasing power of money?

A

It increases the purchasing power of money

 

B

It decreases the purchasing power of money

C

It has no impact on the purchasing power of money

CORRECT OPTION: b

(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)

6

List one factor that can cause inflation.

Expansionary monetary policy can cause inflation.

7

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.

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