Typically, high inflation is a sign of _____.
(a) a struggling economy due to low consumer demand
(b) a struggling economy due to increasing production costs
(c) a robust economy due to increasing aggregate demand
(d) a robust economy due to decreasing production costs.
Answer: (b) a struggling economy due to increasing production costs
High inflation helps people to agree that the economy is not performing well because the costs of production are increasing. During inflation, it is generally found that the overall price level of a basket of goods and services in an economy rises. Production costs are correlated with business costs like labour cost, raw materials cost, and energy cost as well; in case any production cost rises – the probability for businesses to enhance the price of products and services is rather high. Thus, the increase in the prices of the different sectors leads to higher inflation rates. Inflation can be defined as the regular increment of prices of commodities resulting in a decrease in purchasing power and a lot of uncertainties in consumer spending in the economy as well as the decline of overall performance in the economy. Therefore, the prolonged increase in the rates of inflation sufficiently characterizes the presence of serious problems in production and the economy in general and the possibilities for increasing costs for its functioning.
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