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Illustrate your understanding of the term 'inflation'. - Leaving Cert Business - Question 2 - 2001
Question 2
Illustrate your understanding of the term 'inflation'.
Worked Solution & Example Answer:Illustrate your understanding of the term 'inflation'. - Leaving Cert Business - Question 2 - 2001
Step 1
Define Inflation
Answer
Inflation is the rate at which the general level of prices for goods and services rises, eroding purchasing power. It is typically expressed as a percentage and indicates how much more expensive a set of goods and services has become over a certain period, usually a year.
Step 2
Causes of Inflation
Answer
Several factors can cause inflation, including:
- Demand-Pull Inflation: Occurs when demand for goods and services exceeds supply, leading to higher prices.
- Cost-Push Inflation: Results from an increase in the cost of production which leads to an increase in prices.
- Built-In Inflation: Arises from the expectation that prices will rise, prompting workers to demand higher wages, which in turn increases production costs and prices.
Step 3
Effects of Inflation
Answer
Inflation can have both positive and negative effects on an economy:
-
Negative Effects:
- Reduced purchasing power of consumers.
- Increased cost of living, which can lead to dissatisfaction and social unrest.
- Uncertainty in the economy can discourage investment.
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Positive Effects:
- Moderate inflation can stimulate spending, as consumers anticipate future price increases and buy now rather than later.
- Inflation can reduce the real burden of debt, benefiting borrowers.
Step 4
Conclusion
Answer
In summary, inflation is a crucial economic indicator reflecting the rise in prices and involves various causes and effects that can significantly influence the economy. Understanding inflation is essential for both policymakers and consumers in making informed financial decisions.