ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The rate of inflation To measure inflation, we look at the consumer price index (CPI) and how quickly it is rising. For example: In one year, the basket of goods and services the CPI uses costs $100. The next year, the same basket costs $102. That means the average annual rate of inflation is 2 percent.

Detailed explanation-2: -Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow? Answer: C, more than $102.

Detailed explanation-3: -To see how inflation affects the value of $1, first divide the inflation rate by 100. Then, multiply that number by $1 (or any starting dollar amount you wish). Then add that number to your dollar amount.

Detailed explanation-4: -According to the Fisher effect, if inflation rises then the nominal interest rate rises. If the real interest rate is 5% and the inflation rate is 3%, then the nominal interest rate is 8%. Inflation induces people to spend more resources maintaining lower money holdings.