If there is an increase in the money supply that causes prices to rise and leads to inflation, what happens to money?

A. It gains purchasing power.
B. It changes from commodity money to fiat money.
C. It changes from fiat money to commodity money.
D. It loses purchasing power.

Question

If there is an increase in the money supply that causes prices to rise and leads to inflation, what happens to money?

A.	It gains purchasing power.
 		B.	It changes from commodity money to fiat money.
 		C.	It changes from fiat money to commodity money.
 		D.	It loses purchasing power.

anonymous · Answer

D. It loses purchasing power. This is the basic definition of inflation. You have more money but the same amount of goods, meaning that prices will rise and you will have to pay more for a good than before. Ergo, your dollar has less purchasing power than it did before.