The cost-of-living index increased from 100 to 120. What effect does this have on the purchasing power of the dollar?

It means that something you used to buy for $1.00 now costs $1.20.

Thank you for the response. That was the answer that I initially calculated using percentage change; however, the answer is that it was lowered by 16 2/3%. The explanation is that it now takes $6 to buy what used to cost $5. Each dollar is worth 1/6 less.

I can't calculate the correct answer.

I figured it out. 120-100=20, which is the net difference. Divide net difference by the new cost of 120, which equals 16.67 less.

The increase in the cost-of-living index from 100 to 120 indicates that the overall price level of goods and services has increased. To understand the effect on the purchasing power of the dollar, we need to consider how much the value of the dollar has changed relative to the increase in the cost-of-living index.

To calculate the change in purchasing power, we should divide the initial cost-of-living index (100) by the final cost-of-living index (120). The result is 0.8333.

This means that the purchasing power of the dollar has decreased by approximately 16.67% (1 - 0.8333 = 0.1667 or 16.67%).

In simpler terms, your dollar can now buy approximately 16.67% less than it could before due to the increase in the cost-of-living index. This reflects a decrease in the ability to purchase goods and services with the same amount of money.