Value of money is
- Directly related to the price level
- Inversely related to the price level
- Proportionately related to the price level
- All the above
Correct Answer: Inversely related to the price level
Answer Explanation
The value of money is inversely related to the price level. That is, as the price level in an economy increases, its purchasing power decreases, and vice versa. Each unit of currency reduces in value when prices rise (inflation). Deflation, on the other hand, increases the purchasing power of money because each unit of currency can now purchase more goods and services if prices fall (deflation).
Why the other options are not correct
a. Directly related to price level
It is incorrect to state that money is directly related to the price level, since the value of money and the price level are inversely related, not directly related. As previously mentioned, as the price level rises, the value of money decreases, and when the price level falls, the value of money increases.
c. Proportionately related to the price level
The value of money and the price level do not have a proportionate relationship. Instead, they have an inverse relationship, as described above.
d. All the above:
This option is incorrect because the correct answer is (b) – Inversely related to the price level. The value of money is neither directly nor proportionately related to the price level.
Conclusion:
In conclusion, the value of money is inversely related to the price level. When the prices rise, the value of money decreases and as prices fall, the value of money increases. It is crucial to understand this relationship in order to understand how an economy works during inflation and deflation. High inflation can erode purchasing power and have a wide range of economic consequences when the value of money decreases significantly.
In contrast, deflation can change consumer behavior and investment patterns when money values increase. For policymakers and individuals to make informed decisions about managing their finances and the economy, it is imperative to understand how money values work.
I am Bibisha Shiwakoti a final year BBS student from Janapremi College. I have completed my higher secondary education at Kalinchowk Secondary School.
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