Question

Suppose the price level and value of the U.S. Dollar in year 1 are 1 and $1, respectively. Instructions: Round your answers to 2 decimal places. a. If the price level rises to 1.60 in year 2, what is the new value of the dollar? b. If, instead, the price level falls to 0.30, what is the value of the dollar?

Answer 1

a. When the price level rises to 1.60 in year 2, the value of money reduces to $0.625

b. When the price level drops to 0.30 in year 2, the value of money rises to $3.33

Step-by-step explanation:

The relationship between the price level and the value of money is defined such that, the value of money reduces as price level increases

We calculate Value of Money by;

V = 1/P

Where V = Value of Money

P = Price Level

a.

a. When Price Level Rises to 1.25 in year 2

The new value of dollar is calculated as follows;

V = 1/P

Where P = 1.60

V = 1/1.60

V = 0.625

When the price level rises to 1.60 in year 2, the value of money reduces to $0.625

b. When Price Level drops to 0.30

The new value of dollar is calculated as follows;

V = 1/P

Where P = 0.30

V = 1/0.30

V = 3.33

When the price level drops to 0.30 in year 2, the value of money rises to $3.33

Answer 2

a. $0.625

b. $3.33

Step-by-step explanation:

The computations are shown below:

a. If the price level is increase to 1.60, the new value of the dollar would be

= Dollar ÷ price increase

= $1 ÷ 1.60

= $0.625

b. If the price level is decrease to 0.30, the new value of the dollar would be

= Dollar ÷ price decrease

= $1 ÷ 0.30

= $3.33

Simply we divide the dollar value by the price decrease or price increase