Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What effect does price inflation have on money?

1. It increases its value

2. It reduces its purchasing power

3. It makes money more secure

4. It stabilizes the economy

The correct answer is: It reduces its purchasing power

When price inflation occurs, the overall price level of goods and services rises, which leads to the reduction of money's purchasing power. This means that a given amount of money buys fewer goods and services than it did before inflation. As prices increase, consumers find that they need more money to maintain the same standard of living, effectively diminishing the value of money in terms of what it can purchase. Therefore, the primary impact of inflation is the erosion of purchasing power, making this the correct choice. The other options reflect misunderstandings of how inflation interacts with money's function in the economy. Inflation does not inherently make money more valuable or secure, nor does it stabilize an economy; rather, persistent inflation can lead to economic instability and uncertainty.