For each of the following four statements, determine whether they are accurate o

Question

For each of the following four statements, determine whether they are accurate or not?

Explain your answer carefully in each case.

(a) Inflation reduces money costs and hence stimulates an economy during slowdowns.

(b) Inflation increases consumer demand which is necessary for combating slowdowns.

(c) Inflation sometimes increases the demand for workers that increases output and helps combat

slowdowns.

(d) Inflation increases consumer confidence, which is an absolute necessity to counter act busi-

ness cycles

Explanation / Answer

(a) Inflation reduces money costs and hence stimulates an economy during slowdowns - False. Inflation lowers down cost or value of money. It leads to decrease in aggregate demand and hence, strengthen slowdown phase.

(b) Inflation increases consumer demand which is necessary for combating slowdowns. - False. Inflation leads to decrease in aggregate demand due to high prices and hence, strengthen slowdown phase.

(c) Inflation sometimes increases the demand for workers that increases output and helps combat

slowdowns - True. Inflation and unemployment are inversely related in short run as per Phillips curve. Increase in inflation lowers down unemployment.

(d) Inflation increases consumer confidence, which is an absolute necessity to counter act business

False. -Inflation leads to fall in consumer confidence and consumer expect more inflation. Therefore, he increases present demand and lowers down investment.

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