During a period of inflation, which characteristic describes what happens to the purchasing power of money?

• A. An increase in the purchasing power of money
• B. Prices rise but wages do not change
• C. A decrease in the purchasing power of money
• D. The national income grows

Answer: (C)

Inflation means the general price level rises, so the amount of goods and services money can buy falls. In this environment, the purchasing power of money decreases because each unit of currency buys fewer items than before. If wages don’t rise to keep pace, the drop in purchasing power is even more noticeable, but the fundamental idea is that money becomes less capable of purchasing goods. The idea that prices rise while wages stay the same describes one situation that leads to lower purchasing power, but the core point is that inflation erodes purchasing power overall. National income growing, on the other hand, relates to total income in the economy and doesn’t directly describe how much a unit of money can buy.