Inflation reduces the purchasing power of money and hence, the value of money decreases. Discuss.

Inflation is increase or tendency to increase of price in the market over a period of time. As price increases with the same amount of money we can purchase less of the same product and hence purchasing power of the money is decreased. For example, if we purchase a product at price of 10 with 100 units of money we get10 units of the product. Now due to inflation price of 10 becomes, say10 + 2 = 12 where 2 is the increase in price. If we assume we still have only 100 units of moneyavailable with us we can purchase 100/12 = 8.33 units of the same product instead of 10 units of earlier. So the purchasing power of the 100 units of money has decreased from 10 to 8.33 due to the inflation of 20%, i.e. 10*20% = 2 units of price increase. read less