Which is the best definition of inflation?
a gradual decrease in the price of goods and services
a gradual increase in the price of goods and services
an exponential decrease in the price of goods and services
an exponential increase in the price of goods and services

The correct option is "a gradual increase in the price of goods and services "

Inflation is the generalized and sustained increase in the level of prices existing in the market over a period of time, a period of one year. When the general level of prices increases, less goods and services are acquired with each unit of currency. That is to say, that inflation reflects the diminution of the purchasing power of the currency: a loss of the real value of the internal medium of exchange and unit of measure of an economy. A frequent measure of inflation is the price index, which corresponds to the annualized percentage of the general price variation over time (the most common is the consumer price index).

The correct answer is B. Inflation is a gradual increase in the price of goods and services.

EXPLANATION

Inflation is a term in the economy, explaining the increase in the price of services and goods over time. Inflation basically increases the cost of your living. That means you have to earn more money next year to buy food, get a haircut, or even to fill your gas tank.

In a more specific explanation, inflation decreases the power of purchasing every currency unit. For example, the U.S. inflation decreased the value of the dollar, year by year. The dollar value today and the dollar value in the past is different. The dollar value in the past is higher than today. When the price of services and goods rise, then the money automatically buys less. It can reduce your standard of living if you do not earn more over time.  

Demand-pull inflation and cost-push inflation are the two main causes of inflation. Demand-pull inflation is the most common one. This will happen when the demand for goods and services outpaces the supply. Buyers need more product so they are willing to pay a higher price to buy the products or services that they want. The second one is cost-push inflation. This happens when the demand for goods and services does not change, but supply constraints raise the prices of goods and services.

LEARN MORE

If you’re interested in learning more about this topic, we recommend you to also take a look at the following questions:

Building model to analyze economic situation:    

Command economy:  

KEYWORD: inflation, increase, goods, demand-pull inflation, cost-push inflation, the cause of inflation  

Subject: Social Studies

Class: College

Subchapter: Inflation

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