The purchasing power of the dollar
A) has been increasing in recent years because of economic growth.
B) varies directly with the cost-of-living index.
C) is inversely related to the level of aggregate demand.
D) is the reciprocal of the price level.

Question

Quizplus · Accepted Answer

The purchasing power of the dollar is the reciprocal of the price level, meaning that as the price level increases, the purchasing power of the dollar decreases. This relationship is known as the quantity theory of money, which states that the total amount of money in circulation in an economy is directly related to the level of prices. As a result, the value of each unit of currency (i.e. the dollar) decreases as the overall price level increases.

The Purchasing Power of the Dollar