What is inflation?

Inflation is fundamentally defined as the rate at which the general level of prices for goods and services rises over a period of time. When inflation occurs, each unit of currency buys fewer goods and services, indicating a decrease in the purchasing power of money. This concept reflects the observable economic phenomenon where, over time, the average prices of a basket of selected goods and services tend to rise, driven by various factors such as increased production costs, demand-pull factors, and monetary policies.

While the other options touch upon related economic concepts, they do not capture the essence of inflation as directly as option B does. For example, the increase in the quantity of money in circulation may contribute to inflation, but it is not a definition of inflation itself. Similarly, a decline in consumer purchasing power is a consequence of inflation rather than its definition. Lastly, an increase in demand for goods exceeding supply can lead to inflationary pressure but is not synonymous with inflation. Thus, the accurate understanding of inflation lies in recognizing it as a rise in the general price level.