The value of money is affected by

Step 1: Analyze the question The question asks what affects the value of money, meaning its purchasing power, or how much goods and services one unit of money can buy.

Step 2: Explain the concept The value of money is inversely related to the general price level:

• 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, so the value of money rises.

This can be written as:

Value of money = 1 / General price level

Step 3: Evaluate the options

• A. Consumer's income: This affects how much people can spend. It does not directly determine what a unit of money is worth.
• B. Effective demand: This is demand backed by the ability to pay. It affects prices of particular goods, not the value of money directly.
• C. Effective supply: This is the quantity actually offered for sale. It affects individual markets.
• D. Equilibrium price: This is the price of one good or service where demand equals supply. It is not the overall measure.
• E. General price level: This is the average level of prices across the whole economy, and it is what inversely determines the purchasing power of money. ✔

Step 4: Answer

Exam tip: Remember "value of money moves opposite to the price level." If a question mentions inflation or deflation, think of the value of money changing in the opposite direction.