ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -In an inflationary environment, unevenly rising prices inevitably reduce the purchasing power of some consumers, and this erosion of real income is the single biggest cost of inflation. Inflation can also distort purchasing power over time for recipients and payers of fixed interest rates.

Detailed explanation-2: -Relationship Between Prices and Consumer Demand In general, when the price of a good or service changes, consumer demand for that good or service is also impacted. This is the basis for the law of demand, which states that any increase in prices tends to cause the demand for a good or service to decline.

Detailed explanation-3: -Conversely when the price level increases, the value of money decreases which decreases the demand for goods and services.

Detailed explanation-4: -Lower interest rates encourage borrowing by firms that want to invest in new plants and equipment and by households who want to invest in new housing. e. Thus, a lower price level reduces the interest rate, encourages spending on investment goods, and therefore increases the quantity of goods and services demanded.