Question

Which of the following statements are true and which are false? Give reasons.

1. Inflation refers to a persistent upward movement of the general price level.
2. Inflation results in higher level of unemployment.
3. Purchasing power of money falls when price level rises.
4. Creditors gain during inflation.
5. Creeping inflation is regarded essential for economic growth.

Answer 1

1. This statement is True.
   Reason: Inflation is defined as a long-term and continuous rise in the overall price level of goods and services in an economy over time.
2. This statement is False.
   Reason: Inflation and unemployment have a complicated relationship. In the short run, inflation may reduce unemployment, but long-term inflation can cause uncertainty and economic instability, possibly leading to increased unemployment.
3. This statement is True.
   Reason: When prices rise, money's value falls as each currency unit buys fewer goods and services, lowering money's purchasing power.
4. This statement is False.
   Reason: Creditors suffer during inflation because the money they receive in repayment has less purchasing power than when the loan was made. Debtors, on the other hand, benefit from repaying debts with reduced money.
5. This statement is True.
   Reason: Creeping inflation, or an average and consistent price rise (often 1-3% per year), is generally regarded as good for economic growth. It increases spending and investment, boosting output and employment without the damaging implications of rising inflation rates.