What term describes the value of money: the quantity of goods and services one unit of currency can buy?

• A. Inflation
• B. Purchasing power
• C. Deflation
• D. Nominal interest rate

Answer: (B)

Purchasing power is the value of money in terms of how much goods and services one unit of currency can buy. It depends on the price level: when prices rise (inflation), money buys less, so purchasing power falls; when prices fall (deflation), money buys more, so purchasing power rises. Inflation is the rate at which prices rise, not the value itself. Deflation is the opposite. The nominal interest rate is just the stated return on an investment and doesn’t directly describe how much those dollars can buy in goods and services. For example, if a loaf of bread costs $2 today and $2.20 next year because of inflation, the same $2 buys less next year, showing the drop in purchasing power.