Here you can find out How Does Inflation Affect The Value of Money.When inflation arises due to price increases for goods, a distinction is made between different goods.Value of money means the purchasing power of money over goods and services in a country. What a cent can buy in USA represents the value of money of the Cent.
Thus the phrase, “value of money” is a relative concept which expresses the relationship between a unit of money and the goods or services that can be purchased with it. If money buys more commodities then the value of money is high and if it buys less, the value of money is said to be low.
The value of money is of two types. The internal value of money and the external value of money. The internal value of money refers to the purchasing power of money over domestic goods and services. The external value of money refers to the purchasing power of money over foreign goods and services.
How Does Inflation Affect The Value of Money;Casues OF Changes In the Value OF Money Due To Inflation.
- Quantity of Money:
If quantity of money is increased in a country then prices start rising in the country. Due to increase in prices, the purchasing power of money decreases which means fall in the value of money. On the other hand, if quantity of money is decreased in a country then prices start falling in the country. Due to decrease in prices, the purchasing power of money increases which means rise in the value of money.
- Production of Goods and Services:
Value of money is affected by production of goods and services. When there is increase in the quantity of goods and services, the price level starts falling which causes to increase the purchasing power of money and value of money increases. When there is decrease in the production of goods, the price level starts rising which results in decreasing the purchasing power of money and value of money decreases.
- Velocity of Money:
Velocity of money refers to speed with which unit of money moves from hand to hand. More speed indicates high velocity of money. If unit of money does not move from hand to hand then velocity of money is low. High velocity of money causes to increase in the quantity of money, which decreases the value of money. Low velocity of money results in decrease in the quantity of money. Due to decrease in the quantity of money, value of money increases.
- Increase in Population:
If the population of a country increases without corresponding increase in the production of goods and services then demand of goods would rise. This would cause to increase the price level and decrease the purchasing power of money. As a result, value of money decreases.
- Increase or Decrease in Demand:
If demand of goods increases or decreases due to some uncertain circumstances, value of money changes. For example, demand of goods increases in case of war, flood and famine etc. Thus, prices start rising and value ofjnoney decreases. On the other hand, if there is decrease in the demandjoi^oods then the prices start falling and value of money increases.
