Question

Explain why the purchasing power of money falls when the price level rises.

Answer 1

The number of goods and services that a unit of money (for example, the rupee in India) can buy is referred to as the buying power of money. Inflation (a rise in market prices) lowers money's purchasing power. People will be able to buy fewer products and services with the same amount of money during inflation. To put it another way, real income is decreasing. As a result, when the price level rises, the purchasing power of money decreases. For instance - The cost of gasoline in The price of a litre of gasoline in 2020 was ₹90. In the year 2021, the price of a litre of gasoline will have risen to ₹100. As the price of petrol rose, consumers with a hundred rupees had less purchasing power.