Future Business Leader Achievments (FBLA) Economics Practice Exam

Inflation is primarily defined as:

1. An overall increase in the general level of prices

2. A change in the relative price of different goods and services

3. An increase in the price of consumer goods

4. A one-time increase in the price level

The correct answer is: An overall increase in the general level of prices

Inflation is primarily understood as an overall increase in the general level of prices in an economy over a period of time. This increase indicates that, on average, the cost of a basket of goods and services rises, which erodes purchasing power. It is a broad measure impacting all sectors of the economy rather than a change in the price of one or a few specific items. When inflation occurs, it reflects macroeconomic conditions where the aggregate demand for goods and services exceeds aggregate supply, leading to price increases. This concept contrasts with shifts in relative prices, where specific goods or services may become more or less expensive relative to each other without an overarching increase in the general price level. Similarly, inflation is not just limited to consumer goods or a singular event; it is a persistent trend that encompasses all aspects of the economy, influencing wages, savings, investments, and more.