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Explain the relationship between the value of money and the overall price level both algebraically and...

Explain the relationship between the value of money and the overall price level both algebraically and in words.

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Answer #1

The value of money is what a unit of money can buy. While the overall price level is the average of all prices of goods and services in an economy.

There is an inverse relationship between value of money and overall price level. As the price level increases, the value of money decreases (that means that with rise in price level, a unit of money can buy lesser goods that it used to buy earlier) or we can say that the purchasing power of money decreases.

As the price level decreases , the value of money or the purchasing power of money increases (that means that with lower price levels, a unit of money can buy more goods than before).

Algebraically , this relationship can be expressed as -

Price level 1/ Value of money

This shows an inverse relationship between price level and value of money.

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