A major factor affecting the value of money is the?

Step 1: Analyze the question The question asks what mainly determines the value of money. In economics, the value of money means its purchasing power, which is how many goods and services one unit of money can buy.

Step 2: Explain the concept The value of money and the price level have an inverse relationship:

• When the general price level rises (inflation), each naira buys fewer goods, so the value of money falls.
• When the general price level falls (deflation), each naira buys more goods, so the value of money rises.

Formula: Value of money = 1 / Price level

For example, if a loaf of bread rises from ₦500 to ₦1,000, your ₦1,000 now buys only one loaf instead of two. The value of your money has halved.

Step 3: Check each option

• A. Price level: Correct. It directly determines purchasing power.
• B. Banking habits: These affect how people save and use money, but they do not directly determine what a naira can buy.
• C. Transaction motive: This is one of Keynes' reasons for holding money (to carry out day-to-day purchases). It explains demand for money, not its value.
• D. Divisible nature of money: This is a characteristic of money that makes it convenient for exchange. It has no effect on its value.

Step 4: Answer The correct option is A. price level.

Exam tip: "Value of money" and "price level" always move in opposite directions. If a question mentions purchasing power, inflation or deflation, think of the price level first.