CA Foundation · Business Economics · Business Cycles
During a boom, an Indian economy shows rapidly rising demand and capacity constraints. Which effect on prices and on income distribution is most likely?
In a boom, prices rise because demand outstrips capacity, and fixed-income earners lose purchasing power as their nominal income does not keep pace. Businesses usually gain through higher profits, so the claim that fixed-income groups gain is incorrect.
- APrices rise, and fixed-income earners lose purchasing powerCorrect
- BPrices fall, and fixed-income earners gain purchasing power
- CPrices stay constant, and profits fall
- DPrices rise, and fixed-income earners gain relative to businesses
Explanation
Excess demand against capacity limits pushes up the price level in a boom. Those on fixed incomes such as pensioners find their real purchasing power eroded, while profits of businesses often rise. Option four reverses this distribution.
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