If prices rise faster than your savings, your purchasing power:

• A. Grows
• B. Shrinks
• C. Remains the same
• D. Fluctuates

Answer: (B)

Purchasing power is the amount of goods and services your money can buy. When prices rise faster than your savings grow, the real value of your money falls, so you can buy less over time. For example, if you save $100 and earn 1% (to $101) but prices rise by 3%, something that cost $100 now would cost about $103 next year. With only $101, you can’t buy as much as before, so your purchasing power shrinks. It would stay the same only if your savings grew at the same rate as prices, and it would grow only if savings outpaced inflation. The situation described leads to a decline in purchasing power.