Canadian Securities Course (CSC) Level 1 Practice Exam

What are some of the costs of inflation?

1. Economic growth and higher employment rates

2. Increased purchasing power for consumers

3. Erosion of standard of living

4. Stable financial markets

The correct answer is: Erosion of standard of living

The answer is correct because inflation typically leads to an erosion of the standard of living over time. As prices rise, the purchasing power of money decreases, meaning that each dollar buys fewer goods and services than it did before. This can particularly impact individuals and families on fixed incomes, as they may struggle to maintain the same quality of life without corresponding increases in their income. In contrast, economic growth and higher employment rates generally occur in a healthy economic environment, where inflation is either stable or possibly even beneficial. Additionally, inflation does not provide increased purchasing power; rather, it diminishes it as costs rise. Meanwhile, stable financial markets are often associated with low and predictable inflation, rather than high inflation, which can lead to uncertainty and volatility. Therefore, option C accurately highlights a significant consequence of inflation.