According to the Price Distortion Hypothesis

question 30

Multiple Choice

According to the price distortion hypothesis

• A) inflation interferes with the information which prices convey to market participants in the absence of inflation.
• B) inflation makes it easier for a firm to know whether an increase in the price of the product is due to an increase in its demand (relative to substitutes)and therefore more profitable to produce,or simply a result of the increase in the (general)price level.
• C) inflation makes it easier for a buyer to know whether an increase in the price of the product denotes an increase in its price relative to substitutes and therefore buy less of the good,or simply a result of the increase in the (general)price level.
• D) low or zero inflation creates 'noise' in the price system and thereby distorts the price signals,much the same way static or 'noise' makes a radio message harder to interpret.
• E) moderate inflation makes it easier for households to plan their futurE.

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Definitions:

Original Lender

The financial institution or lender that originally provided the loan or credit to a borrower.

Insurance Policy

A contract between an insurer and the insured, outlining the terms under which the insurer agrees to compensate the insured for specific losses.

Risks

The possibility of loss, injury, or other adverse or unwelcome circumstance; a chance or situation involving such a possibility.

Duties of Insurer

The responsibilities an insurance company is bound to fulfill, including issuing policies, collecting premiums, and paying out claims.