What determines the value (domestic purchasing power) of money?

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The value of money is derived from a variety of sources. Essentially, the currency has whatever value people are willing to take it for. If someone is willing to sell a hamburger for one dollar, that dollar has that value, so it's "worth" is not intrinsic, but based entirely on what the system demands. Now, this number is determined by several factors, namely the economic system.

If a community's government and therefore economic system is weak, it will not have a great amount of buying power outside of itself, which weakens the value of its currency (if you are sourcing that hamburger from outside of your community and the community's economy is weak, the price will be driven higher because of the relative expense of the ingredients coming from stronger economic systems).

In many cases, a nation's money supply is backed by something—historically in America it was gold (the gold standard). For about a century, though, since the amount of gold held in reserves is relatively low, the Federal Reserve bank has "backed" the supply of money based on a value they determine—so they "set" the value of money. Overall, however, the strength of the economy is the main determining factor in the value of a currency.

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Essentially everything in a country's economy and its political system determines the value of its money.  The economy and the politics of the country work together to determine the price level that prevails in the economy and this, in turn, determines the purchasing power of the currency.

In order for the currency to have strong purchasing power, a country must be economically productive and politically stable.  It must be economically productive so that economic growth can occur and the price level can stay low.  It must be politically stable so that people are confident enough in the government and economy that they will be willing to save and invest.  These things also drive the price level down.

Thus, there is no one factor that determines the purchasing power of a currency.  It is impacted by everything that happens in an economy and government.

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