When inflation causes relative-price variability,
A)consumer decisions are distorted and the ability of markets to efficiently allocate factors of production is impaired.
B)consumer decisions are distorted,but markets are still able to efficiently allocate factors of production.
C)consumer decisions are not distorted,but the ability of markets to efficiently allocate factors of production is impaired.
D)consumer decisions are not distorted and markets are still able to efficiently allocate factors of production.

Question

Quizplus · Accepted Answer

When inflation causes relative-price variability, consumer decisions are distorted because they have a difficult time distinguishing changes in prices due to inflation from changes in prices due to changes in supply and demand. This can lead to misallocation of resources and inefficient outcomes in the market. Hence, the ability of markets to efficiently allocate factors of production is impaired.

When Inflation Causes Relative-Price Variability