Which of the following does inflation help to explain?

• A. The decrease in the purchasing power of money over time
• B. The increase in the supply of natural resources
• C. The reduction in unemployment rates
• D. The improvement in technological efficiency

Answer: (A)

Verified step by step guidance

1. Understand the concept of inflation: Inflation refers to the general increase in prices of goods and services over time, which leads to a decrease in the purchasing power of money.
2. Recall that purchasing power is the amount of goods or services that one unit of money can buy; when inflation occurs, each unit of currency buys fewer goods and services than before.
3. Analyze each option in the context of inflation: Inflation does not directly cause an increase in natural resources, a reduction in unemployment, or improvements in technology.
4. Recognize that the key effect of inflation is the erosion of money's value, meaning that the same amount of money will buy less in the future compared to the present.
5. Conclude that inflation helps to explain the decrease in the purchasing power of money over time, as this is the direct economic consequence of rising price levels.