Deflation Increases Money's Purchasing Power

Steps:

• Deflation is a sustained decrease in the general price level of goods and services.
• With falling prices, each unit of currency buys more goods, enhancing its value.
• This effect is real, as it reflects actual buying capacity adjusted for price changes.
• Thus, deflation raises the real purchasing power of money held.

Why D is correct:

• By definition, deflation erodes prices, so money's real purchasing power rises as it commands more goods per unit (inverse of price level via quantity theory of money: MV = PY).

Why the others are wrong:

• A: Deflation increases the real value of debts, as fixed nominal repayments become harder with more valuable money.
• B: Deflation often lowers nominal interest rates to stimulate spending, though real rates may rise.
• C: Purchasing power increases, but "real" specifies adjustment for price changes, making D more precise.

Final answer: D