What type of risk is associated with the erosion of real value of money due to inflation?

The correct type of risk associated with the erosion of the real value of money due to inflation is reflected in the concept of purchasing power risk. This risk is fundamentally about how inflation diminishes the value of money over time, impacting the amount of goods and services that can be purchased with a fixed sum of money.

In this context, inflation poses a threat to savings and investments because if the returns on these financial instruments do not keep up with the rate of inflation, then the investor's real returns, or the actual increase in their purchasing power, may be negative. This dynamic illustrates how inflation risk can lead to a loss of value in financial assets if those assets do not yield a return that compensates for rising prices.

Looking at the other types of risk mentioned, credit risk pertains to the potential default of a borrower to repay a debt, market risk relates to the volatility of a security's value due to changes in market conditions, and liquidity risk involves the difficulty potential investors may encounter when trying to sell an asset quickly without impacting its price. None of these directly address the impact of inflation on the real value of money. Thus, inflation risk is the appropriate designation for concerns about the erosion of purchasing power.