In the context of introduction to economics, how does inflation encourage speculation?

• A. By reducing the purchasing power of money, prompting individuals to invest in assets that may appreciate in value.
• B. By lowering interest rates, making holding cash more profitable than investing in assets.
• C. By increasing the real value of fixed incomes, making saving more attractive than investing.
• D. By stabilizing prices, which discourages risk-taking and speculative behavior.

Answer: (A)

Verified step by step guidance

1. Understand the concept of inflation: Inflation is the general increase in prices over time, which reduces the purchasing power of money.
2. Recognize that when inflation occurs, holding money becomes less attractive because the same amount of money will buy fewer goods and services in the future.
3. Identify that to protect their wealth, individuals may seek to invest in assets (like real estate, stocks, or commodities) that are expected to maintain or increase their value despite inflation.
4. Understand that this behavior of shifting money from cash to assets in anticipation of price increases is called speculation.
5. Conclude that inflation encourages speculation by reducing the purchasing power of money, prompting individuals to invest in assets that may appreciate in value.