International Baccalaureate (IB) Practice Exam 2025 – Complete Study Resource

The term that refers to the loss of purchasing power due to the overall rise in prices is inflation. Inflation occurs when the general price level of goods and services in an economy increases over time, which means that each unit of currency buys fewer goods and services. This results in a decrease in the purchasing power of money, meaning that consumers are unable to buy as much with the same amount of money as they could in the past.

Understanding inflation is crucial because it impacts savings, wages, and the general cost of living. It can be influenced by various factors, including increased demand for products, rising production costs, and monetary policy decisions. The other terms listed, such as interest, deflation, and depreciation, refer to different economic concepts. Interest rates relate to the cost of borrowing money, deflation indicates a decrease in the general price level, and depreciation typically refers to the reduction in value of an asset over time.