Answer:
Inflation is defined as a general steady or continuous rise in price level of goods and services, resulting to reduction in purchasing power.
Explanation:
Inflation is a general steady or continuous rise in price level of goods and services. Inflation reduces the purchasing power of consumers such that when the price of a good is increased, a consumer buys less of the good, holding consumer's income constant. For instance, assume a cup of coffee is sold for $10 per cup. If a consumer earns $100 per month and wants to spend all of his income on coffee, he would buy 10 cups of coffee (that is, 100/10 = 10). Let's now assume that inflation set in such that the price of coffee is raised to $20 per cup, the consumer would not be able to buy 10 cups any longer. Thus, he would buy only 5 cups (that is, 100/20 = 5). This implies that the consumer's purchasing power has reduced from 10 cups to 5 cups. Purchasing power means the amount of goods and/or services that a consumer's money (income) can buy. From the instance above, we can see that there is an inverse (negative) relationship between inflation and purchasing power. As individuals, we experience the effect of inflation on our purchases. As price of goods go up, we tend to buy less of them since our income is fixed.
