ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Inflation reduces a currency’s purchasing power and what that currency can buy. Loss of purchasing power has the effect of an increase in prices. To measure purchasing power in the traditional economic sense, you could compare the price of a good or service against a price index such as the Consumer Price Index (CPI).

Detailed explanation-2: -Which explanation best explains the effects of inflation? Consumers have more products to choose from. Inflation erodes (take away from) the purchasing power of the dollar.

Detailed explanation-3: -In an inflationary environment, unevenly rising prices inevitably reduce the purchasing power of some consumers, and this erosion of real income is the single biggest cost of inflation. Inflation can also distort purchasing power over time for recipients and payers of fixed interest rates.

Detailed explanation-4: -Inflation increases the price of goods and services over time, effectively decreasing the number of goods and services you can buy with a dollar in the future as opposed to a dollar today.

Detailed explanation-5: -The purchasing power of a dollar in 2022 was about 92.6 percent of the purchasing power of a dollar in 2021. This can be calculated by dividing the CPI-U U.S. city average all items annual average index value for 2021 by the CPI-U U.S. city average all items annual average index value for 2022, as shown in table 1.