Once consumers recognize that a period of inflation has begun, there is generally an increase in consumer spending. T...

Mehran October 9, 2018

@Thomas-Siwula sure! Let's break it down.

This is a Paradox question so we are looking for the answer choice that serves as a POSSIBLE explanation for the discrepancy in the stimulus.

What is the discrepancy?

When consumers recognize that a period of inflation has begun, there is generally an increase in consumer spending because consumers do not want to put off purchases that will surely increase in price.

But during periods of protracted inflation, consumers eventually put off even routine purchases despite also expecting prices to continue to rise.

So why does consumer spending increase when a period of inflation begins but does not increase during periods of protracted inflation?

Let's take a look at (E):

"Consumers' purchasing power decreases during periods of protracted inflation since salaries do not keep pace with prices."

Would this be a possible explanation?

Yes! Notice it distinguishes between inflation and protracted inflation and gives a possible reason for consumers putting off even routine purchases during a period of protracted inflation, i.e. consumers' purchasing power decreases during these protracted periods because salaries do not keep pace with prices.

So (E) would be the correct answer.

Hope that helps! Please let us know if you have any other questions.

Ryan-Mahabir August 9, 2019

Why is D incorrect?

Victoria August 10, 2019

Hi @Ryan-Mahabir,

The passage tells us that "once consumers recognize that a period of inflation has begun, there is generally an increase in consumer spending." This can be explained by "consumers' desire not to postpone purchases that will surely increase in price."

However, "during protracted periods of inflation, consumers eventually begin to put off making even routine purchases" even though they still recognize that these purchases will continue to increase in price and "salaries also rise during inflationary periods."

We are looking for the answer choice which helps to resolve the discrepancy: Why would consumers put off making routine purchases?

Answer choice D is incorrect because, unlike the passage, it fails to address the motivations of consumers. It simply tells us what happens if significant numbers of consumers are unable to make purchases. It does not tell us why consumers may put off making routine purchases despite their recognition that the price will continue to increase and their increase in salary.

Hope this helps! Please let us know if you have any further questions.