GED Social Studies : Inflation and Deflation

Study concepts, example questions & explanations for GED Social Studies

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Example Questions

Example Question #1 : Inflation And Deflation

"If you make money scarce you make money dear. If you make money dear you drive down the value of everything, and when you have falling prices you have hard times. And who prosper by hard times? There are but few, and those few are not willing to admit that they get any benefit from hard times. No party ever declared in its platform that it was in favor of hard times, and yet the party that declares for a gold standard in substance declares for a continuation of hard times. It is hard to talk when all the conditions are favorable, and I must ask you to excuse me from talking any further in the presence of the noises against which we have to contend today."

-William Jennings Bryan

In the preceeding passage, the 1896 Democratic presidential nominee, William Jennings Bryan, is railing against which economic phenomenon which he associates with economic "hard times"? 

Possible Answers:

Recession

Debt

Investment

Inflation

Deflation

Correct answer:

Deflation

Explanation:

Deflation is the term in economics for a general fall in prices. This does not mean that a decrease in the price of single good signifies deflation. A "general fall" is a situation where prices across the economy are falling in aggregate. While in passing it might seem like falling prices seem obviously good (who doesn't like cheap stuff?!), deflation has proved to be a problematic phenomenon in practice. Falling prices, for instance, also necessitate falling wages. It is now widely accepted that most episodes of deflation are caused by fluctuations in the money supply. When the money supply shrinks, prices fall as the value of any single dollar is increased by the dollar's newfound rarity. When Bryan criticizes making "money dear" he is criticizing an inadequate supply of money that is unneccesarily driving prices down. When he mentions that there are a few who benefit from "hard times", he hints at what economists have identified as the biggest problem with a bout of deflation. Changes in the price level affect different people differently. For interest, those that have large cash holdings or those that have lent money out with large interest rates stand to gain from the money supply shrinking and their own holdings becoming more valuable. Deflation frequently implies a redistrubution of wealth away from the poor or debtors to the rich or creditors, which can be economically and socially destabilizing. 

Example Question #2 : Inflation And Deflation

Most contemporary economists favor a __________.

Possible Answers:

low and steady rate of inflation

high and steady rate of inflation

high and fluctuating rate of inflation

complete lack of inflation

low, but fluctuating rate of inflation

Correct answer:

low and steady rate of inflation

Explanation:

Inflation is the increase in the price of something, or the fall of the purchasing power of money over time. Most contemporary economists favor a low rate of inflation that is predictable and steady, rather than no inflation whatsoever, and certainly much more than high and fluctuating levels of inflation. A low and steady rate of inflation, according to the majority of economists, makes it much easier for the economy to recover after a recession or depression.

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