Inflation occurs when ...

Inflation occurs when ...

• A. The money supply is high
• B. Prices fall
• C. Unemployment rises
• D. Taxes increase

Answer: (A)

Inflation is a sustained rise in the overall price level in an economy. When the money supply is high, there are more dollars in circulation chasing the same amount of goods and services, so prices tend to rise across many items. That broader increase in prices is what inflation describes, so a high money supply is the situation that best explains inflation. Deflation would be prices falling, not inflating. Unemployment rising reflects struggles in the job market and demand conditions, but it isn’t the definition of inflation itself. Taxes increasing can influence prices indirectly, but inflation specifically means a general rise in prices, not merely a change in tax policy.

Inflation is a sustained rise in the overall price level in an economy. When the money supply is high, there are more dollars in circulation chasing the same amount of goods and services, so prices tend to rise across many items. That broader increase in prices is what inflation describes, so a high money supply is the situation that best explains inflation.

Deflation would be prices falling, not inflating. Unemployment rising reflects struggles in the job market and demand conditions, but it isn’t the definition of inflation itself. Taxes increasing can influence prices indirectly, but inflation specifically means a general rise in prices, not merely a change in tax policy.