What is one effect of inflation on the economy?

• A. Increases purchasing power
• B. Creates clearer economic planning
• C. Reduces purchasing power
• D. Stabilizes market prices

Answer: (C)

Inflation generally leads to a reduction in purchasing power, which is the correct choice. When inflation occurs, the prices of goods and services increase, meaning that each unit of currency buys fewer goods than it did before. This decline in purchasing power can significantly affect consumers, as they are able to afford less with their money over time, leading to potential decreases in overall consumer spending.

In an inflationary environment, wages may not keep pace with rising prices, further exacerbating the issue as people struggle to maintain their standard of living. Savings can also lose value in real terms, which can discourage individuals from saving money.

The other options do not accurately reflect the common effects of inflation. It does not increase purchasing power; in fact, it does the opposite. Economic planning tends to become more complicated during inflationary periods rather than clearer, as businesses struggle to predict costs and set prices. Stabilizing market prices is more characteristic of deflationary periods or stable economies rather than one experiencing inflation.