Maintaining of Value of Money Explained With Examples

The phenomenon of increasing prices for goods and services is called “inflation”.

Example:

Prices rose 100% during a given year. A pair of jeans that had cost $30 at the beginning of the year will cost $60 by the end of the same year. Assume that Nate borrowed $30 from his friend in order to buy a pair of jeans. They decide that Nate should repay the loan at the end of the year without interest. At the end of the year Nate was prepared to repay the $30, but in truth he thought that it was unfair for him to pay this amount. His friend had done him a favor by lending him money to buy a pair of trousers, but the same amount of money could now buy only half a pair of trousers. He therefore decided to give his friend $60 instead which was enough to buy one full pair of trousers. In such a case, we say that Nate’s loan was linked to the price of the jeans.