Question

If there is a decrease in the money supply that causes prices to fall and leads

to deflation, what happens to money?
A. It changes from commodity money to fiat money.
B. It changes from fiat money to commodity money.
C. It gains purchasing power.
D. It loses purchasing power.

Answer 1

Answer: C

If prices fall, the value of money (1/P) rises. Therefore, the purchasing power of every dollar is higher.