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.

---

Definitions:

Ceramic Rod

A rod made of ceramic material, often used in applications requiring high temperature resistance or electrical insulation.

Composition Carbon

Likely refers to carbon composition resistors, electronic components made from carbon dust or graphite paste, used for their stable electrical resistance.

Variable Resistor

An electronic component that can adjust the flow of electrical current through it by changing its resistance.

Potentiometer

A variable resistor with a sliding contact that is used as a voltage divider.