Question

Suppose you make 100 per dlay now (2017), your father made $80 per day in 15r and your grandfather made $50 in 1957. Who could afford the most consumption if the inflation rate is 2% per year? A You B Your father C Your grandfather D The same. ed 15 ner hour in 2011, the base

Answer 1

Answer

Inflation is the increase in general price level of the economy. If price level in 1957 is p₀ in the economy and imflation rate is 2%, then price level in 1958 is (1+0.02)p₀. So price level after 30 years i.e. at 1087 is p₀(1+0.02)^30.

In 1957, grandfather made $50 so, at price level P_0, consumption capacity was = $50/P_0 and in 1987, father made $80, so, at price level P_0 (1 + 0.02)^30 consumption capacity was = $80/(1 + 0.02)^30 P_0 = $44.16 middot 1/P_0 and in 2017, you make $100 so, at price level P_0 (1 + 0.02)^60 consumption capacity is = $100/(1 + 0.02)^60 P_0 = $30.48 1/P_0 so, e > your grandfather could affard the most consumption.