Inflation does not reduce purchasing power if:

• A. faster than prices
• B. the same rate as prices
• C. slower than prices
• D. not related to prices

Answer: (B)

Purchasing power means how much goods and services your money can buy. Inflation is the general rise in prices. When prices rise, money buys less unless your income or the amount of money you hold also rises. If the rate at which your income grows matches the rate of price increases, your real purchasing power stays the same. That’s why inflation doesn’t reduce purchasing power in that case. If inflation outpaces your income growth, purchasing power falls; if your income grows faster than prices, purchasing power rises. Inflation is about prices, so saying it’s not related to prices doesn’t fit the concept.