Question

If there is an increase in the money supply that causes prices to rise and
leads to inflation, what happens to money?
A. It gains purchasing power.
B. It loses purchasing power.
c. It changes from commodity money to fiat money.
D. It changes from fiat money to commodity money.

Answer 1

The increase in the money supply that causes prices to rise and leads to inflation, loses purchasing power.

What is inflation?

Inflation refers to the persistent rise in the general prices of commodities in the economy over a period of time. If the prices of goods and services increase in an economy without an increase in income of people, it reduces the purchasing power of individuals.

This follows the law of demand which states that; the higher the price, the lower the quantity demanded; the lower the price, the higher the quantity demanded.

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