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    Question

    Which statement is correct regarding the situation of Inflation in an Economy?

    A The purchasing power of money is increased Correct Answer Incorrect Answer
    B The purchasing power of Money is reduced Correct Answer Incorrect Answer
    C There will be no effect on the value of money Correct Answer Incorrect Answer
    D Interest rates will decrease to counter the effect of inflation Correct Answer Incorrect Answer

    Solution

    Inflation reflects a reduction in the purchasing power of money. For example, XYZ Ltd. buys 10 litre of Petrol @ Rs.75 per litre from Indian Oil, thereby spending a total of Rs.750 on petrol. After one month petrol price is increased to Rs.80 per litre. Now, XYZ Ltd would be able to purchase only 9.38 litre petrol from Rs.750/- as against 10 litre petrol from the same Rs.750 one month ago. Hence purchasing power of money (Rs.750) reduced due to inflation. Inflation will always reduce the value of money unless interest rates are higher than inflation.

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