Consider the following statements about the value of money:
(A) If the price of a pencil is Rs 2, a rupee is worth 0.5 pencil.
(B) A general increase in the price level lowers the value of money in terms of any commodity.
(C) If the prices of all commodities double, a rupee is still worth 0.5 pencil.
(D) To act well as a store of value, the value of money must be sufficiently stable.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → (A), (B) and (D) only
The value of a rupee in a good is 1 divided by its price. When prices rise, a rupee buys less.
(A) If the price of a pencil is Rs 2, a rupee is worth 0.5 pencil. — Correct. 1 ÷ 2 = 0.5 pencil.
(B) A general increase in the price level lowers the value of money in terms of any commodity. — Correct. A unit of money now buys less of every good.
(C) If the prices of all commodities double, a rupee is still worth 0.5 pencil. — Incorrect. The pencil now costs Rs 4, so a rupee is worth 1 ÷ 4 = 0.25 pencil.
(D) To act well as a store of value, the value of money must be sufficiently stable. — Correct. Rising prices erode the wealth kept in money.
NCERT (2026-27): “3.1 Functions of Money … If the price of a pencil is Rs 2 and that of a pen is Rs 10 we can calculate the relative price of a pen with respect to a pencil, viz. a pen is worth 10 ÷ 2 = 5 pencils. The same notion can be used to calculate the value of money itself with respect to other commodities. In the above example, a rupee is worth 1 ÷ 2 = 0.5 pencil or 1 ÷ 10 = 0.1 pen. Thus if prices of all commodities increase in terms of money i.e., there is a general increase in the price level, the value of money in terms of any commodity must have decreased - in the sense that a unit of money can now purchase less of any commodity. …” “… Thus money can act as a store of value for individuals. Wealth can be stored in the form of money for future use. However, to perform this function well, the value of money must be sufficiently stable. A rising price level may erode the purchasing power of money.” |