NGPF Personal Finance – Investing Practice Test

Purchasing power is the amount of goods and services money can buy. When dollars buy less than before, inflation has reduced purchasing power. As prices rise over time, a fixed amount of money buys fewer items. For example, if inflation is 3% per year, what costs $100 today would cost about $103 next year, so your $100 buys roughly 3% less. In real terms, your purchasing power has fallen even if the cash amount hasn’t changed. This idea matters for savers and investors because you want returns that exceed inflation to maintain what your money can buy. Other concepts describe different ideas—diversification is spreading risk, default risk is the chance of not getting paid, and interest rate risk concerns how rates affect bond prices—but they don’t capture the erosion of money’s buying power over time.