Question

Inflation, in theory, occurs _______.

• A. when the prices of essential commodities outstrips income
• B. when money supply grows at a higher rate than GDP in real terms
• C. when the exchange rate of a currency falls
• D. when fiscal deficit exceeds balance of payment deficit

Answer 1

The correct option is B when money supply grows at a higher rate than GDP in real terms

In economics, inflation is a sustained increase in the general price level of goods and services in an economy over a period of time resulting in a loss of value of currency. When the price level rises, each unit of currency buys fewer goods and services.