Which scenario is most likely the result of inflation?

• A. The real value of fixed incomes rises.
• B. The purchasing power of money decreases, making goods and services more expensive.
• C. Interest rates decrease while the value of currency increases.
• D. Unemployment rates fall as prices remain stable.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of inflation. Inflation is the general increase in prices of goods and services over time, which leads to a decrease in the purchasing power of money.
2. Step 2: Analyze each scenario in relation to inflation. Inflation typically causes money to buy less than before, so the purchasing power of money decreases.
3. Step 3: Consider the effect on fixed incomes. Inflation usually reduces the real value of fixed incomes because the same nominal amount buys fewer goods and services.
4. Step 4: Evaluate the relationship between interest rates and currency value during inflation. Inflation often leads to higher interest rates and a decrease in currency value, not the opposite.
5. Step 5: Assess the impact on unemployment and price stability. Inflation is associated with rising prices, so stable prices and falling unemployment are not direct results of inflation.