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How does the purchasing power of money relate to the price level?

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sara212 | Student, Undergraduate | (Level 1) Salutatorian

Posted July 27, 2011 at 1:32 PM via web

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How does the purchasing power of money relate to the price level?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted July 27, 2011 at 1:39 PM (Answer #1)

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Basically, there is an inverse relationship between the price level and the purchasing power of money.  The higher the price level (all other things being equal) the lower the purchasing power of money.

The reason for this is that the price level in an economy refers to a measure of the price of all goods and services in that economy.  When the price level rises, things are more expensive.  When things get to be more expensive, each dollar (in the US) is worth less.  This is because each dollar cannot buy as many goods and services as it once could.

Overall, then, the purchasing power of money is inversely related to the price level in the economy.

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