Final answer:
Inflation is the process where the value of money decreases and the prices of goods increase. While an average inflation rate of 3% might seem small, over time it significantly erodes purchasing power. Hyperinflation, a more extreme form of inflation, can lead to the abandonment of the affected currency for barter or a more stable foreign currency.
Step-by-step explanation:
The concept that money is merely a piece of paper holds true, especially when a country experiences inflation. Inflation can be thought of as an economic balloon, where there is a consistent rise in prices and a corresponding decrease in the value of money. To illustrate, if the rate of inflation is 2% per year, an item such as a pack of gum that costs $1 today would cost $1.02 the following year. Thus, your dollar's purchasing power weakens as it can no longer buy as much as it used to.
While many believe that more money equates to better purchasing ability, this isn't the case during inflation. In fact, inflation has been around 3% on average since 1926. At this rate, something that costs $20 now would cost nearly $40 in twenty years. These rising prices reflect a decrease in the dollar's purchasing power over time, which is why people's ability to buy goods with the same amount of money diminishes.
Extreme inflation, or hyperinflation, is even more destructive. It can lead to situations where the currency loses value so rapidly that the economy transitions back to bartering, or another stable currency takes its place. Hyperinflation is detrimental to economies as it makes the currency nearly worthless, triggering a collapse in economic activity since it stops being worthwhile to work for rapidly devaluing money.