The Purchasing Power of Money

The purchasing power of money, as explored by economist Irving Fisher in The Purchasing Power of Money (1911), is directly linked to the quantity of money in circulation. This concept is central to the quantity theory of money, which posits a relationship between the amount of money and the general price level.12

Fisher's work developed the idea that if the money supply increases, prices tend to rise, thus reducing the purchasing power of each unit of currency. Conversely, a decrease in the money supply can lead to lower prices and increased purchasing power. This theory helps explain phenomena like inflation and deflation.134