In macroeconomics, inflation is said to exist when which of the following situations occurs over time in an economy?

Introduction / Context:
Inflation is one of the most important concepts in macroeconomics, affecting purchasing power, interest rates, and economic policy. Examination questions usually test whether students know that inflation refers to changes in the general price level rather than the price of a single good. The question here asks which description correctly captures the essence of inflation in an economy.

Given Data / Assumptions:

• We are looking for a definition that applies to the overall price level, not just isolated goods.
• The time dimension is important, as inflation is about changes over a period.
• We assume a standard macroeconomic definition based on consumer price index or similar measures.
• We distinguish between price level changes and changes in output or purchasing power.

Concept / Approach:
Inflation is defined as a sustained or continuous increase in the general price level of goods and services in an economy over time. It means that on average, prices are rising, not that every single price is increasing. As prices rise, the purchasing power of money falls; that is, each unit of currency buys fewer goods and services. This is different from deflation, which is a sustained fall in the general price level, and from growth in real output, which is about quantities produced rather than prices.

Step-by-Step Solution:
1. Identify that the question is about macro level behaviour of prices, not just a single market.2. Recall that inflation refers to a general rise in the overall price level across a broad basket of goods and services.3. Note that this rise must be persistent over time, not just a one time change.4. Compare Option A, which states that there is a general increase in the price level over time, with the standard definition.5. Recognise that this option matches the standard macroeconomic definition of inflation.

Verification / Alternative check:
Inflation is often measured using indices such as the consumer price index, wholesale price index, or GDP deflator. When these indices show a trend of rising values over months or years, economists say there is inflation. Each index is constructed from prices of a representative basket of goods and services, ensuring that the measure reflects a general price movement, not just one sector. This supports the idea that inflation is a broad, sustained increase in the overall price level.

Why Other Options Are Wrong:
Option B: Periodic decreases in the price level describe instances of deflation or disinflation, not inflation.
Option C: Continuous increases in output refer to economic growth, which can occur with or without inflation.
Option D: A rise in the purchasing power of money is associated with falling prices, which is closer to deflation rather than inflation.
Option E: A completely constant price level would mean there is neither inflation nor deflation, which is not what the question is describing.

Common Pitfalls:
Students sometimes confuse relative price changes with inflation. If the price of one good, such as petrol, rises while others fall, that is not necessarily inflation unless the overall price level rises. Another error is to equate inflation with any high price level; inflation is about the rate of change of prices, not the absolute level. Remembering the distinction between level and change, and between general and specific price movements, helps to answer such questions correctly.

Final Answer:
Inflation exists when there is a general increase in the overall price level of goods and services over time.