Question

Your grandmother tells you a dollar doesn’t go as far as it used to. She says the “purchasing power” of a dollar is much less than it used to be. Explain what she means. Try to use and explain terms like inflation and deflation in your answer.

Answer 1

What she means is that a dollar does not buy the same amount of things as it used to. Take a .05 cent candy as an example, in year one the candy costs 5 cents which means you can buy 20 candies. In year 2 the price is .08 cents and you can buy 1/.08 = 12.5 or simply 12 candies. Assuming the candy hasn't increased in quality, this is known as inflation.