Why does the value of money fall when there is inflation?

Answer 1

"Inflation" is defined as an increase in the overall level of prices

over an extended period of time. Or in other words Inflation occurs

when the supply of money far exceeds the supply of goods and services.

The functions of money are to serve as a medium of exchange, a unit of

account, and a store of value. Inflation mainly affects the ability of

money to serve as a store of value, since inflation erodes money's

purchasing power, making it less attractive as a store of value. Money

also isn't as useful as a unit of account when there's inflation,

because stores have to change prices more often and because people are

confused and inconvenienced by the changes in the value of money.

Any inflation affects this function of money and obliges us to make

the distinction between nominal and real prices, for example when

looking at GDP figures. Inflation often makes the financial

performance of companies and investments more difficult to judge. It

is easy to see an increase in nominal profit and judge that to be a

good result whereas, in fact, real profit has declined.