Final answer:
The correct statement is that as inflation increases, purchasing power decreases. This happens because each unit of currency buys fewer goods and services as prices rise. Inflation can lead to unintended negative effects, such as lost purchasing power, particularly if wages and other economic variables do not adjust in tandem.
Step-by-step explanation:
The statement that accurately describes the effect of inflation on purchasing power is: As the rate of inflation increases, purchasing power decreases. Inflation measures how much more expensive a set of goods and services has become over a certain period, usually a year. When inflation occurs, every dollar you own buys a smaller percentage of a good or service. For example, if you could buy a pack of gum for $1 last year, and the inflation rate is 2% annually, then you may need $1.02 to buy the same pack of gum this year; your dollar has less purchasing power.
Unintended redistributions of purchasing power can result from inflation impacting various stakeholders differently. If someone has money in a bank earning a 4% interest rate and inflation is at 5%, the real interest rate they are getting is actually -1%, meaning their savings lose purchasing power over time. Inflation undermines the value of money held in cash or in assets that don't adjust in line with rising prices.
To maintain purchasing power parity, macroeconomic policies should aim for the growth of purchasing power in the economy at a rate similar to the production of goods. Otherwise, inflation can spiral, diminishing consumers' ability to purchase goods and services and causing potential economic instability.