Final answer:
Inflation most undermines the currency's ability to store value due to the reduction in purchasing power caused by an increase in prices, often as a result of government printing money to cover deficits.
Therefore, the correct answer is: option 1) Inflation.
Step-by-step explanation:
The factor that most undermines the ability of a nation's currency to store value is inflation.
Inflation occurs when there is 'too much money chasing too few goods,' leading to an increase in prices and a decrease in the purchasing power of the currency.
High inflation can be caused by government actions such as printing money to cover large budget deficits or making loans to politically favored firms, as seen in the extreme case of hyperinflation in Zimbabwe.
Conversely, deflation can increase the currency's value over time, but it can have adverse effects on the economy, making borrowing more expensive and encouraging money hoarding.
Stable economies with strong government policies aim for balanced price stability, which is key to maintaining the currency's value over time.