Which of the following is true of the value of money? It

Analyze the question: We are asked which statement is true about the value of money, meaning its purchasing power, or how much goods and services one unit of money can buy.

Explain the concept: The value of money is the reciprocal of the general price level.

• When prices rise (inflation), each naira buys fewer goods, so the value of money falls.
• When prices fall (deflation), each naira buys more goods, so the value of money rises.

So: Value of money = 1 / Price level

This is an inverse relationship.

Evaluate each option:

• A. Positively related to the price level. False. If prices rise, money's value falls, so the relationship is negative.
• B. Depends on the value people attach to it. This is partly plausible, since money's acceptance rests on public confidence. But it is a vague statement and not the standard economic relationship being tested.
• C. Determined by the government. False. The government can influence the money supply, but the value of money is determined by the interaction of money supply, demand for money, and the price level in the economy.
• D. Inversely related to the price level. True. This is the standard definition: a higher price level means lower purchasing power, and vice versa.

Example (Nigerian context): If a loaf of bread rises from ₦500 to ₦1,000, then ₦1,000 buys only one loaf where it once bought two. The value of the naira has fallen as the price level rose.

Answer: The correct option is D.

Exam tip: Remember "Prices up, money's value down." Whenever you see "value of money" and "price level" in the same question, look for the word inverse.