Understanding Inflation and Deflation

What is the primary effect of inflation on purchasing power?

• It decreases purchasing power.

• It increases purchasing power.

• It has no effect on purchasing power.

• It stabilizes purchasing power.

Which type of inflation occurs when demand exceeds supply?

• Hyperinflation

• Cost-push inflation

• Demand-pull inflation

• Built-in inflation

What historical event is used as an example of cost-push inflation?

• The French Revolution

• The Industrial Revolution

• World War II

• The Great Depression

What is a common consequence of deflation?

• Increased consumer spending

• Decreased real debt

• Stable prices

• Increased unemployment

Why do central banks aim to keep inflation between two and three percent?

• To increase the value of currency

• To avoid the negative effects of both inflation and deflation

• To decrease interest rates

• To encourage rapid economic growth