What is the relationship between the purchasing power of money and the rate of inflation?

Answer 1

Purchasing power of a money is --> For X amount of money u can buy A mount of goods,

Inflation is ---> General price rise in commodities

Rate of inflation ---> the increase/decrease in inflation is subsequent years.

So, naturally, If rate of inflation is high PP of money will go down

B'cuz, Price of products are high, the power of ur money to buy them comes down

So, PP of money and Rate of inflation is inversely related..

Answer 2

There are many theories about the causes of inflation, but economic predictions based on those theories have not always been substantiated by ensuing developments. There are strong arguments to substantiate the theory that inflation may/can/does affect exchange rates (See Related Links below.) However, in reality there may be no direct relationship between the two. We know that exchange rates continually fluctuate, but the cost to the consumer is more stable, the supply chain and currency hedging absorbing much of the variations.

If we take the view that inflation is the consequence of other factors, and if we explore various scenarios of this causal relationship in fundamental ways, we can see how significant exchange rate changes can be a factor affecting inflation. e.g. Scenario 1. If country 'C' (Consumer) depends on imports from Another Country 'S' (supplier) but the traders have no corresponding exports to the supplying country 'S', and if the exchange rate becomes significantly adverse and there is no alternative supply, and if the 'C' consumers are willing and able to pay more for the goods being imported, and if demand and supply does not change, then trade will continue, and imports will be dearer and the increased cost will be passed on to the consumer. In this hypothetical and simplistic situation where the exchange rate is the main influencing variable, then inflation will occur. Scenario 2. Consider the same trade circumstances as scenario 1. But this time the exchange rate becomes significantly favourable to the Consuming country. But this time imagine that there are only a few traders responsible for the imports, which is not an unusual situation. The immediate consequence of cheaper import costs will be greater profits for the traders, all other things being equal and assuming that the importers don't pass on the cost-savings into the internal supply chain to the consumer. Greater company profits can be shared with shareholders in the form of dividends, and the executives and maybe the staff will receive pay awards or bonuses, giving certain people higher spending power. If a sufficient number of people have greater spending power, then this drives prices up as consumers are more able and willing to pay higher prices! And higher prices means…inflation again! Again this is a hypothetical and simplistic state of affairs, and paints a rather artificial picture of the mechanisms of inflation. It could be argued that there are only a few that become rich in the above scenario. But if a few become very rich, another economic/political/social theory is based on the 'trickle down effect' which argues that the riches of the few 'trickles down' into the population in general as the rich buy goods and services from others, thus increasing the wealth of the sellers of goods and services. If this is so, then the greater spending power of the masses will drive inflation.

The above circumstances seem to indicate a lose/lose situation! However, the above examples do not reflect all the complex factors and interactions that play roles in inflation. Also it should be noted we have only used 'cost to the consumer' inflation, whereas there are other measures of inflation that affect different groups of people/organisations. For example there is the index-measuring of raw material costs (commodities). In any particular period there are swings in the index, up and down, across the whole spectrum of commodity costs. Sometimes these cancel each out by the time these costs affect inflation, i.e. as basic materials are converted into a wide range of consumer goods, all subject to market and economic considerations. An interesting question to ask would be, Do higher prices always increase inflation? Inflation seems to be a fact of life, but few, if any, understand the causes of it. Many 'key drivers' have been suggested, and governments have striven to control the factors that would appear to drive inflation, but often without sustained success.

* For a more detailed consideration of the theories regarding 'inflation and exchange rates', plus additional scenarios, see Related Links below this box.

Answer 3

Inflation is the devaluing of currency by physically printing more without having equivalent assets added to your possession. It would make imports cost more and exports be worth less. Its what the president did when he printed a trillion dollars and poured it into the pockets of all those responsible for the economic crash in the first place.