General Studies · Cause and Effect

Given below is a cause followed by possible effects numbered I and II. Read the cause carefully and decide which of the options is correct. Cause: Inflation is an increase in the general price level of goods and services in an economy. More jobs and higher wages increase household incomes and lead to a rise in consumer spending, further increasing aggregate demand and the scope for firms to increase the prices of their goods and services. When this happens across a large number of businesses and sectors, this leads to an increase in inflat ion. Effect I: In an inflationary environment, unevenly rising prices inevitably reduce the purchasing power of some consumers. Effect II: Those with wealth tend to inherit more and as they have managed to put aside money and invest surpluses, they will be least damaged by any rampant inflation in the economy.