Which of the following is a possible effect of inflation?

• A. A decrease in nominal wages
• B. A decrease in the purchasing power of money
• C. An increase in the real value of savings
• D. A reduction in the general price level

Answer: (B)

Verified step by step guidance

1. Understand the concept of inflation: Inflation is the general increase in the price level of goods and services over time, which means that money loses value in terms of what it can buy.
2. Recall the definition of purchasing power: Purchasing power refers to the quantity of goods and services that can be bought with a unit of money. When prices rise due to inflation, the purchasing power of money decreases.
3. Analyze each option in relation to inflation: For example, a decrease in nominal wages is not necessarily caused by inflation; nominal wages often rise with inflation. An increase in the real value of savings is unlikely during inflation unless interest rates exceed inflation rates. A reduction in the general price level is the opposite of inflation (deflation).
4. Focus on the correct effect: Inflation typically causes a decrease in the purchasing power of money because as prices rise, each unit of currency buys fewer goods and services.
5. Summarize the key takeaway: The most direct and consistent effect of inflation is that it reduces the purchasing power of money, which aligns with the correct answer.