When inflation fluctuates significantly,
A)the signals provided by relative prices improve.
B)the signals provided by relative prices are distorted.
C)the cost of inflation is minimized.
D)nominal interest rates will be low.

Question

Quizplus · Accepted Answer

When inflation fluctuates significantly, the signals provided by relative prices are distorted. This is because the changes in overall price level make it difficult to distinguish between changes in the general price level and changes in relative prices of individual goods and services. As a result, it becomes harder for market participants to make informed decisions, leading to inefficiencies in resource allocation.

When Inflation Fluctuates Significantly