BUSINESS ADMINISTRATION
BUSINESS POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Inflation
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Price reductions
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Recessions
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Deflation
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Detailed explanation-1: -What creates inflation? Long-lasting episodes of high inflation are often the result of lax monetary policy. If the money supply grows too big relative to the size of an economy, the unit value of the currency diminishes; in other words, its purchasing power falls and prices rise.
Detailed explanation-2: -More jobs and higher wages increase household incomes and lead to a rise in consumer spending, further increasing aggregate demand and the scope for firms to increase the prices of their goods and services. When this happens across a large number of businesses and sectors, this leads to an increase in inflation.
Detailed explanation-3: -Thus greater the money supply, higher the price level and vice versa. Also, a change in money supply can bring about a change in prices. Hence if a country is facing high levels of inflation, reducing money supply would moderate inflation.