[Glossary](https://pecuvo.eu/en/glossary/) · Money and currencies # Purchasing power **In short:** Purchasing power is the amount of goods and services a given sum of money can buy; inflation reduces it. **Simply put:** The number on the banknote stays the same, but what it buys changes. That is why every sum, interest rate or salary is compared with inflation. The real interest rate is roughly the nominal rate minus inflation. Switching currency at a fixed rate — for example from a national currency to the euro — does not by itself change purchasing power. **Example:** A €1,000 deposit at 2% interest becomes €1,020 in a year. If prices rose by 3%, that €1,020 buys what €990.29 bought a year earlier — a real loss of about 0.97%. **Watch out:** Deposit guarantees protect you if a bank fails, not against inflation. Cash "under the mattress" also loses purchasing power every year. **Source:** ECB, monetary policy strategy (2% target) — https://www.ecb.europa.eu/mopo/strategy/html/index.en.html · GFLEC, the "Big Three" questions — https://gflec.org/education/questions-that-indicate-financial-literacy/ ## In depth in the modules - [Module 1](https://pecuvo.eu/en/modules/history-of-money/) - [Module 2](https://pecuvo.eu/en/modules/currencies-and-backing/) - [Module 3](https://pecuvo.eu/en/modules/assets-and-cash-equivalents/) ## Related terms - [Inflation](https://pecuvo.eu/en/glossary/inflation/) - [Real and nominal interest rate](https://pecuvo.eu/en/glossary/real-interest-rate/) - [Deflation](https://pecuvo.eu/en/glossary/deflation/) - [Euro changeover in Bulgaria](https://pecuvo.eu/en/glossary/euro-changeover/) - [Saving](https://pecuvo.eu/en/glossary/saving/)