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    Question

    Which one of the following is an effect of inflation: 

    A It leads to rise in purchasing power Correct Answer Incorrect Answer
    B It leads to increase in GDP Correct Answer Incorrect Answer
    C It leads to inflow of foreign investments Correct Answer Incorrect Answer
    D It leads to fall in purchasing power Correct Answer Incorrect Answer
    E None of the above Correct Answer Incorrect Answer

    Solution

    Inflation leads to fall in purchasing power. When the price level rises, each unit of currency buys fewer goods and services; consequently, inflation is also erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy.

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