Future Business Leaders of America (FBLA) Personal Finance Practice Test

What does it mean when an economy is experiencing inflation?

1. The purchasing power of money is increasing

2. The prices of goods and services are decreasing

3. The prices of goods and services are steadily rising

4. The economy is in a recession

The correct answer is: The prices of goods and services are steadily rising

When an economy is experiencing inflation, it means that the prices of goods and services are steadily rising over time. This increase in prices indicates that the purchasing power of money is decreasing; consumers will need to spend more money to buy the same items they could have purchased for less in the past. Inflation is often measured by the Consumer Price Index (CPI) or Producer Price Index (PPI), which track the price changes in a basket of consumer goods and services. This phenomenon can be caused by various factors, including increased demand for goods and services, higher costs of production, or sensational monetary policy, where more money is circulated in the economy than there are goods available to purchase. Understanding inflation is crucial as it impacts consumer behavior, investment decisions, and overall economic policy. In contrast, the other options describe conditions that do not align with inflation. For instance, increasing purchasing power or decreasing prices suggests a deflationary scenario rather than inflation. Additionally, stating that the economy is in a recession does not accurately reflect the characteristics of inflation, which can occur even when the economy is growing.