Inflation causes money to lose its value over time.
It happens because inflation measures the loss of the purchasing power of money and reflects the general increase in prices. The higher the inflation, the greater the monetary devaluation.
For example, a product that costs "x" in January will have an inflationary increase that will raise this value to "y" in December of the same year. However, the value of money will be the same in January and in December of that year, unless it is applied to some source of secure income, such as savings, that corrects that ammount monthly.
Inflation causes money to lose its value over time.
Further explanation:
Inflation:
A gradual and persistent increase in the price of goods and services over a period of time is termed as inflation. It makes the purchase of goods and services expensive to the consumers. With same level of income, consumers can purchase less number of goods and services due to inflation. Inflation may be caused by number of factors like high level of aggregate demand, low level of supply of goods, expansionary monetary policy of central bank or expansionary fiscal policy by government.
Relationship between inflation and money value:
Inflation lowers the purchasing power of money over time. The equivalent amount of money is able to purchase a low quantity of goods and services in the scenario of inflation.
Example:
A person X has money income of $2000 which he spends on purchase of goods and services.
Before inflation:
[tex]\begin{aligned}The\:price\:of\:a\:pound\:of\:apples\:is\:\$2.\\(Then,\:the\:pounds\:of\:apples\:\\which\:can\:be\:purchased\:by\:X)&=\dfrac{\$2000}{\$2}\\&=1000\:pounds\:of\:apples.\end{aligned}[/tex]
After inflation:
[tex]\begin{aligned}The\:price\:of\:a\:pound\:of\:apples\:rises\:to\:\$5\\(Then,\:the\:pounds\:of\:apples\\\:which\:can\:be\:purchased\:by\:X)&=\dfrac{\$2000}{\$5}\\&=400\:pounds\:of\:apples.\end{aligned}[/tex]
Therefore, inflation causes money to lose its value over time.
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Answer details:
Grade: Senior School
Subject: Economics
Chapter: Money and banking
Keywords: inflation, causes, money, value, money and banking, purchasing power, over time, money value, relation between inflation and money value, purchasing power of money, monetary value.
