Question

Which of the following statements are consistent with how inflation affects the three functions of money? Check all that apply.

Answer 1

Answer:

B,C, D, E

Explanation:

B. Rising prices (inflation) makes comparism of financial data less reliable.  This is one of the major drawbacks of historic financial information because such information does not take into account the impact of inflation.

C. Money loses its attributes as a store of value in inflationary period. This is because the nominal value of money increase through an increase in Consumer Price Index (CPI) while the real value of money drops as the unit amount of purchasing power decrease from increase in prices.

D. The demand for money increases in inflationary period as more money chases few goods. This reduces purchasing power of individuals and leads to rise in prices.

E. This has the potential of reducing purchasing power as money loses its value in periods of inflation.