Inflation's Impact on Prices and Purchasing Power

Steps:

• Define inflation as a sustained increase in the general price level of goods and services.
• Assess each option by linking inflation's effects to economic concepts like price levels, competitiveness, and real vs. nominal values.
• Eliminate options that contradict standard inflation outcomes.
• Confirm the option that aligns with inflation's core definition.

Why C is correct:

• Inflation raises the general price level, directly increasing the cost of living as consumers need more money for the same goods and services (per the Consumer Price Index definition).

Why the others are wrong:

• A: Higher domestic inflation makes exports more expensive abroad, reducing competitiveness and likely decreasing exports.
• B: Inflation increases nominal costs but typically lowers real costs by eroding money's value over time.
• D: Inflation decreases the purchasing power of money, as each unit buys fewer goods.

Final answer: C