Accredited Wealth Management Advisor Practice Exam

Inflation refers to the rate at which the general level of prices for goods and services rises, leading to a decrease in the purchasing power of money. As inflation increases, each unit of currency buys fewer goods and services than it did in the past. This decline in purchasing power means that consumers are able to afford less with the same amount of money, as prices for essential items like food, housing, and transportation rise.

When inflation occurs, if wages and income do not increase at the same rate, individuals will find it increasingly challenging to maintain their standard of living. Therefore, option B accurately describes the common effect of inflation on purchasing power, as it directly correlates with the monetary value of the currency and the ability to purchase goods and services.

The other options reflect misunderstandings about inflation's impact. Increasing purchasing power suggests that consumers would be able to buy more with their money, which contradicts the basic principle of inflation. Stating that it has no effect ignores the fundamental economic relationship between inflation and purchasing capabilities. Finally, the notion that it stabilizes purchasing power fails to acknowledge that inflation introduces volatility and often disrupts what consumers can afford.