Question
Which statement is correct regarding the situation of
Inflation in an Economy?Solution
Inflation reflects a reduction in the purchasing power of money. For example, XYZ Ltd. buys 10 litre of Petrol @ Rs.75 per litre from Indian Oil, thereby spending a total of Rs.750 on petrol. After one month petrol price is increased to Rs.80 per litre. Now, XYZ Ltd would be able to purchase only 9.38 litre petrol from Rs.750/- as against 10 litre petrol from the same Rs.750 one month ago. Hence purchasing power of money (Rs.750) reduced due to inflation. Inflation will always reduce the value of money unless interest rates are higher than inflation.
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