Economics for Hawaii Teachers Practice Test 2025 – Comprehensive Exam Prep

Inflation impacts purchasing power by reducing it; when prices rise due to inflation, consumers are able to buy fewer goods and services with the same amount of money. This happens because the overall cost of living increases, and thus the same dollar amount does not stretch as far as it used to. For instance, if inflation causes the price of a loaf of bread to rise from $2 to $3, a consumer with $10 can now purchase only three loaves instead of five.

This illustrates the connection between rising prices and decreased purchasing power; as prices inflate, consumers may have to make choices about what essentials they can afford. While wages may eventually adjust, they often lag behind inflation, leading to diminished purchasing capability in the short term. Hence, the assertion that inflation decreases purchasing power is foundational to understanding its economic impact.