What is inflation?
Correct answer
Answer D: When the general price level of many goods and services rises.
Quick explanation
One product becoming more expensive is not enough. If many prices rise, the same amount of money buys less on average.
Detailed explanation
Inflation describes changes in a broad price level, not an individual price. In a market economy, prices change constantly: some goods get more expensive, others cheaper, and others stay the same. Inflation occurs only when prices of many typical consumer goods and services rise on average over a period.
To measure it, statistical agencies track a broad basket of goods and services. Spending categories on which households spend more on average receive greater weight than smaller expenses. Price changes are used to calculate a price index and then an inflation rate, usually compared with the same month of the previous year.
When the general price level rises, a monetary unit's average purchasing power falls: one euro buys less than before. The inflation rate does not, however, mean every price rises or every household is affected exactly alike. It is an average measure. A growing money supply alone is not the definition of inflation either; measured price changes are decisive.
Example or everyday application
If a representative basket rises from 100 euros to 105 euros, its price level has increased by 5 percent. A single coffee becoming more expensive would not be enough.
Common misconception
Beginners often equate every individual price increase with inflation. The explanation separates relative price changes from broad changes in the price level.