If inflation occurs, what happens to the purchasing power of money?

• A. Increases
• B. Decreases
• C. Stays the same
• D. Doubles

Answer: (B)

Inflation means prices for goods and services rise across the economy. When prices go up, the same amount of money buys fewer items, so the purchasing power of money falls. In other words, money becomes less valuable in terms of what it can buy. That’s why the correct idea is that purchasing power decreases. The other ideas don’t fit because inflation doesn’t give you more buying power, and with normal inflation it isn’t staying the same—prices are rising, so the money you hold buys less. (Doubling would imply an extreme or opposite movement, which isn’t the general effect of inflation.)