Question

Inflation implies

• A. Rise in budget deficit
• B. Rise in general price index
• C. Rise in price of consumer goods
• D. Rise in money supply

Answer 1

The Correct Option is B

Inflation is a term used in economics to describe a sustained increase in the general price level of goods and services in an economy over a period of time. It implies that there is a rise in the general price index, which includes a broad range of products and services. Here's a breakdown of the concept to clarify:

1. General Price Index: This index is a measure that captures the average change in prices over time for a basket of goods and services. When this index rises and the purchasing power of money decreases, it is characterized as inflation.

2. Connection to Consumer Goods: While inflation does affect consumer goods, it is not limited to them alone but extends to service prices as well. Therefore, "rise in price of consumer goods" as an option is more specific than inflation's broad measure.

3. Budget Deficit and Money Supply: While a rise in money supply can cause inflation if not matched by output, and budget deficits can be related to inflation, neither directly defines inflation as a rise in general price levels.

Based on these explanations, the correct answer to the question is that inflation implies a rise in general price index.