Suppose you have $7,000 in savings when the price level index is at 100.
A. If inflation pushes the price level up by 10 percent, what will be the real value of your savings?
B. What is the real value of your savings if the price level declines by 10 percent?
Unsure
Suppose you have $7,000 in savings when the price level index is at 100.
A. If inflation pushes the price level up by 10 percent, what will be the real value of your savings?
B. What is the real value of your savings if the price level declines by 10 percent?
To find the real value of your savings after a change in the price level, you need to adjust the nominal value of your savings for inflation or deflation.
A. If inflation pushes the price level up by 10 percent, you can find the real value of your savings by adjusting it with the inflation rate. Here's how:
1. Calculate the inflation-adjusted price level index:
Inflation-adjusted price level index = Current price level index + (Current price level index * Inflation rate)
In this case, the inflation rate is 10 percent, so the adjusted price level index would be:
Inflation-adjusted price level index = 100 + (100 * 0.10) = 110
2. Calculate the real value of your savings:
Real value of savings = Nominal value of savings / Inflation-adjusted price level index
Real value of savings = $7,000 / 110 = $63.64
Therefore, the real value of your savings after a 10 percent increase in the price level index would be $63.64.
B. If the price level declines by 10 percent, you can use a similar process to calculate the real value of your savings:
1. Calculate the deflation-adjusted price level index:
Deflation-adjusted price level index = Current price level index - (Current price level index * Deflation rate)
In this case, the deflation rate is 10 percent, so the adjusted price level index would be:
Deflation-adjusted price level index = 100 - (100 * 0.10) = 90
2. Calculate the real value of your savings:
Real value of savings = Nominal value of savings / Deflation-adjusted price level index
Real value of savings = $7,000 / 90 = $77.78
Therefore, the real value of your savings after a 10 percent decrease in the price level index would be $77.78.