Which of the following best describes how inflation impacts the purchasing power of money over time?

• A. Inflation has no effect on the purchasing power of money over time.
• B. Inflation decreases the purchasing power of money, meaning you can buy fewer goods and services with the same amount of money.
• C. Inflation increases the purchasing power of money, allowing you to buy more goods and services with the same amount of money.
• D. Inflation only affects the value of money in foreign countries, not domestically.

Answer: (B)

Verified step by step guidance

1. Understand the concept of purchasing power: Purchasing power refers to the quantity of goods and services that can be bought with a unit of money.
2. Recognize what inflation means: Inflation is the general increase in prices of goods and services over time in an economy.
3. Analyze the relationship between inflation and purchasing power: When prices rise due to inflation, each unit of money buys fewer goods and services than before.
4. Conclude the impact of inflation on purchasing power: Therefore, inflation decreases the purchasing power of money over time.
5. Verify that this effect is domestic and affects the real value of money within the economy, not just in foreign countries.