How does inflation typically affect consumers' purchasing power when nominal income does not increase at the same rate as prices?

• A. It decreases purchasing power because the same amount of money buys fewer goods and services.
• B. It increases purchasing power because higher prices raise the real value of money.
• C. It has no effect on purchasing power because inflation only changes nominal variables, not real ones.
• D. It decreases purchasing power only if the CPI is falling, not when it is rising.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the concept of purchasing power, which refers to the quantity of goods and services that can be bought with a unit of money.
2. Step 2: Recognize that inflation means a general increase in the price level of goods and services over time.
3. Step 3: Note that if nominal income (the amount of money earned) does not increase at the same rate as prices, consumers have relatively less money to spend on goods and services.
4. Step 4: Realize that when prices rise but income remains constant or grows more slowly, the same amount of money buys fewer goods and services, meaning purchasing power decreases.
5. Step 5: Conclude that inflation typically decreases consumers' purchasing power unless nominal income rises at least as fast as prices.