Question

Which of the following could cause inflation? loss of resources leading to fewer goods being available increased spending by consumers and businesses higher prices all of the above A and B above only

Answer 1

Inflation is defined as a trend increase in general price levels. That is, it indicates the incremental behaviour of price levels over a period of time.

A general increase in price level can be experienced with an increase in price of raw materials used for production and/or wages paid to workers. This increase can be the result of a shortage of resources and especially when the resources are destroyed/lost due to some unfortunate happenings. Higher price of resources used in production leads to higher cost of production, leading to an increase in the goods' price.

Also with consumers and businesses willing to spend more (and demand more goods), the firms can increase the prices based on inelastic demand preferences of customers. A continued behaviour of increased spending leads firms to exploit such situations with higher prices.

However, higher prices are not a cause of inflation. Higher prices over time 'reflect' inflation. They are an indication of inflation prevailing in an economy, and not one of its causes.

Correct Answer : A and B above only