Inflation causes the value of money to decrease.

Inflation causes the value of money to decrease.

• A. True
• B. False
• C. It depends on the inflation rate
• D. Not enough information

Answer: (A)

Inflation lowers the purchasing power of money. When price levels rise, the same amount of money buys fewer goods and services. For example, with 3% inflation, something that costs $1 today would cost about $1.03 next year, so your dollar buys less than before. The nominal amount stays the same, but its real value—the amount of stuff it can buy—declines. Any positive inflation erodes money’s value over time, so the statement is true.

Inflation lowers the purchasing power of money. When price levels rise, the same amount of money buys fewer goods and services. For example, with 3% inflation, something that costs $1 today would cost about $1.03 next year, so your dollar buys less than before. The nominal amount stays the same, but its real value—the amount of stuff it can buy—declines. Any positive inflation erodes money’s value over time, so the statement is true.