The sequence of events by which inflation can reduce output is:
A)as prices rise, the quantity of goods and services demanded increases, the firms therefore, produce more output which causes the unemployment to increase.
B)as prices rise, the quantity of goods and services demanded increases, the firms therefore, produce more output which causes the unemployment to decrease.
C)as prices rise, the quantity of goods and services demanded falls, the firms therefore, produce less output which causes the unemployment to increase.
D)as prices rise, the quantity of goods and services demanded falls, the firms therefore, produce less output which causes the unemployment to decrease.

Question

Quizplus · Accepted Answer

When prices increase, the purchasing power of consumers decreases. As a result, they tend to demand less and firms produce less output to meet the decrease in demand. This leads to a reduction in overall economic activity, which can cause unemployment to increase. Therefore, inflation can reduce output through a decrease in demand and production.

The Sequence of Events by Which Inflation Can Reduce Output