Which statement accurately describes the effect of inflation on the purchasing power of money?

Which statement accurately describes the effect of inflation on the purchasing power of money?

• A. The purchasing power of money decreases
• B. The purchasing power of money remains constant
• C. The purchasing power of money increases
• D. Prices fall while wages rise

Answer: (A)

Inflation is a general rise in prices, so money buys fewer goods and services over time. When the price level increases, the same amount of money can’t purchase as much, meaning purchasing power falls. For example, if prices rise 5%, a product you could buy today for $100 might cost $105 later, unless incomes rise enough to match the increase. The statement that purchasing power decreases best matches this relationship. The other ideas don’t fit: constant purchasing power would require no inflation; increasing purchasing power would need falling prices or incomes outrunning prices; and prices falling with wages rising describes a opposite scenario to inflation, which would typically boost purchasing power rather than reduce it.

Inflation is a general rise in prices, so money buys fewer goods and services over time. When the price level increases, the same amount of money can’t purchase as much, meaning purchasing power falls. For example, if prices rise 5%, a product you could buy today for $100 might cost $105 later, unless incomes rise enough to match the increase. The statement that purchasing power decreases best matches this relationship. The other ideas don’t fit: constant purchasing power would require no inflation; increasing purchasing power would need falling prices or incomes outrunning prices; and prices falling with wages rising describes a opposite scenario to inflation, which would typically boost purchasing power rather than reduce it.