Another term for the purchasing power of money is the real value of money. The purchasing power of money is an essential indicator in making decisions. If purchasing power goes down, you get less product for using the same amount of money as before. Conversely, if the purchasing power goes up, you get more products.
The source of the decline in purchasing power comes from the inflation rate. During high inflation, the government should adopt a contractionary economic policy (through monetary policy or fiscal policy) to reduce it. Among the options are:
When the purchasing power of money falls, serious negative economic consequences arise, including: Increasing the costs of producing goods and services. Companies have to spend more to buy raw materials and pay workers. Increase in the cost of living.
If inflation is relatively low and stable, the decline in money’s purchasing power may not be significant. However, if inflation suddenly spikes high, the purchasing power of money quickly evaporates. The condition in which inflation is so high we call hyperinflation.