When inflation occurs:
A) All prices are rising
B) Each dollar of income will buy more output than before
C) The purchasing power of money increases
D) The purchasing power of money decreases

Question

Quizplus · Accepted Answer

When inflation occurs, the general price level rises, which means that the purchasing power of money decreases. It takes more money to buy the same goods and services as before, so the value of money has decreased. Option A is incorrect because not all prices may rise at the same rate. Option B is incorrect because the decline in purchasing power offsets any increase in output that one may receive. Option C is incorrect because the purchasing power of money actually decreases during inflation.

When Inflation Occurs