Which of the following pieces of evidence best supports the idea that inflation has occurred in an economy?

• A. The government has reduced its spending.
• B. The value of the national currency has appreciated in foreign exchange markets.
• C. The unemployment rate has decreased.
• D. The general price level of goods and services has increased over time.

Answer: (D)

Verified step by step guidance

1. Understand the definition of inflation: Inflation is the rate at which the general price level of goods and services in an economy rises over a period of time, leading to a decrease in the purchasing power of money.
2. Identify the key indicator of inflation: The primary evidence of inflation is an increase in the general price level, which means that on average, prices of goods and services are higher than before.
3. Evaluate the given options in relation to inflation: - Government spending changes do not directly indicate inflation. - Currency appreciation relates to exchange rates, not directly to domestic price levels. - A decrease in unemployment relates to labor market conditions, not price levels. - An increase in the general price level directly reflects inflation.
4. Conclude that the best evidence supporting inflation is the increase in the general price level of goods and services over time, as this matches the economic definition of inflation.
5. Remember that inflation is measured by indexes such as the Consumer Price Index (CPI) or the GDP deflator, which track changes in the average price level.