Question

During highly inflationary episodes, relative prices change more drastically.

a. CPI/GDP ratio deflator remains constant.

b. This is shoe-leather cost of inflation.

c. This makes it easier for households and businesses to make decisions.

d. This makes it harder for households and businesses to make decisions

Answer 1

Option d. When relative prices are changing drastically, it signals rapid changes in quantities of demand and supply. So it conveys information about scarcities of goods in the economy. Therefore rapid rise in relative prices are market phenomenon. Consumers keep adjusting their budget to accommodate changes in prices and businesses find harder to negotiate contract with suppliers affecting their business decision making. This is in contrast with inflation - where there is a general trend of price increase in a year due to macroeconomic factors such as - too much money chasing too few goods. However during high inflationary periods relative price changes are too affected dramatically .

Option a. During high inflationary periods both CPI and GDP deflator ratio are increasing. They are not constant.

Option b. Shoeleather costs are monetary phenomenon witnessed during inflationary conditions. People have to hold more money in the form of cash and make frequent bank trips. This does not explain drastic changes in relative prices.

Option c. Incorrect.