Future Business Leaders of America (FBLA) Securities and Investments Practice Test

What is the primary cause of inflation?

1. High unemployment levels

2. Too few dollars in circulation

3. Too many dollars chasing too few goods

4. Excessive production capacity

The correct answer is: Too many dollars chasing too few goods

The primary cause of inflation is the phenomenon where too many dollars are chasing too few goods. This situation arises when the demand for goods and services exceeds their supply, leading to increased prices. In an economy, if consumers have more money to spend but the number of goods available remains constant or decreases, businesses will increase prices in response to heightened demand. This concept aligns with the basic economic principle of supply and demand: when demand outstrips supply, prices naturally rise. This scenario is often exacerbated by monetary policy that results in an increase in the money supply without a corresponding increase in the output of goods and services, further driving inflation. Understanding this relationship is crucial for recognizing how various economic indicators and policies can impact inflation levels within an economy. Factors such as high unemployment levels, a lack of dollars in circulation, or excessive production capacity do not directly contribute to the same inflationary pressure as the imbalance described when too many dollars chase too few goods.