Chapter 3 Part 1 - Money

Economics Class 12
Macroeconomics

What is purchasing Power of Money?

Purchasing power of money refers to the quantity of goods and services that can be purchased

with it.

Eg: If a person has Rs 60 and want to buy biscuits

Now, the cost of 1 packet of biscuit is Rs10

Here the money can buy 6 packets of biscuit

What causes Deterioration in Purchasing Power of Money?

Inflation in price levels of goods and services cause deterioration in purchasing power of money

Inflation refers to the increase in general price levels of goods and services.

Eg: In 2015

Eg: If a person has Rs 60 and want to buy biscuits

Now, the cost of 1 packet of biscuit is Rs10

Here the money can buy 6 packets of biscuit

(60/10=6)

Now, in 2021

The person has Rs100 to spend on biscuits

The cost of 1 packet of biscuit has increase to Rs 12 because of inflation

As a result, the money in 2021 can only buy 5 packets of biscuit

(60/12=5)

So, we can see that the purchasing power of money has decreased due to inflation

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