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

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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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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