Question

Q. Whih of the following are the effects of inflation on the economy?

Select the correct answer using the codes given below:

• A.
  1 only
• B.
  1 and 2 only
• C.
  2 and 3 only
• D.
  1, 2 and 3

Answer 1

The correct option is D

1, 2 and 3
Explanation:

Statement 1 is correct: It erodes the purchasing power of the cash as in the same amount of cash the same quantity of goods can’t be purchased due to inflation. Thus, it erodes the purchasing power of the cash.

Statement 2 is correct: As a response to declining purchasing power of cash consumers tend to spend more in the present than in future. As a result it can generate growth and employment in the economy by generating demand.

Statement 3 is correct: The real rate of return diminishes due to the inflation as inflation erodes the purchasing power of power of the cash so lender is at losing end.