Question

3. Explain what caused inflation. Why do you think it is easier to estimate the ten-year average inflation rate from the inflation rate in a single year?
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Answer 1

Answer-Inflation is the condition in which there is an increase in the general price level of goods and services which are produced in the economy. The main reason which caused inflation is an increase in the price of production costs due to an increase in the price of raw materials which means the increase in the price of materials which is used to make finished goods for the consumers when the price of finished goods will increase then it will increase the inflation in the economy. Increase in the price of wages also increase the production cost of raw materials into finished good which also leads to an increase in inflation rate because when wages of labor increases then it affect the production cost and due to increase in production cost the price of finished good increases and leads to increase in inflation. Calculating or estimating inflation rate is very easier because If we assume a particular inflation rate per year lets say x%, then in a year the price will be 100 times that is in value form will be 100 + x more than the current price. In two years the value will be the (100 + x)% of the value in one year, and in 10 years the price (100 + x)% will be raised to the 10th power time of the present value, by this method of estimating inflation rate we can easily find out the actual and future inflation rates.