Association of Chartered Certified Accountants (ACCA) Certification Practice Test

Which of the following is a consequence of inflation on living standards?

1. An increase in purchasing power

2. Stability in job security

3. An increase in the cost of living

4. A decrease in consumer spending

The correct answer is: An increase in the cost of living

Inflation reflects a general rise in prices, leading to an increase in the overall cost of living. As prices for goods and services rise, consumers find that their money does not stretch as far as it once did, meaning they can purchase less with the same amount of income. This can significantly impact living standards, as individuals and families may need to allocate more of their budget to essential items like food, housing, and transportation, leaving less available for discretionary spending or savings. The impacts of inflation manifest in various ways. While nominal incomes may rise, real purchasing power can decrease unless income growth outpaces inflation. This disconnect often leads to financial strain, especially for those with fixed incomes or salaries that do not keep pace with inflation. Consequently, the increase in the cost of living directly correlates with deteriorating living standards, as people's ability to maintain their previous level of consumption diminishes.