Question

Devon's annual income grows at a rate of 2.9% per year, and inflation is 3.1% per year. After one year, how much can Devon

buy with his annual income?
O less than today because 3.1% is greater than 2.9%
less than today because the inflation rate is greater than 0
O more than today because 3.1% is greater than 2.9%
O more than today because interest is earned on the account

Answer 1

Devon's annual income increases at a rate of 2.9% per year, which means that after one year, his income will be 1.029 times his current income. However, due to inflation of 3.1% per year, the purchasing power of money decreases, which means that after one year, the amount of goods and services that can be purchased with the same amount of money will be 1/1.031 times what it is today.

Therefore, after one year, Devon can buy (1.029/1.031) times what he can buy today with his annual income. Simplifying this expression gives:

1.029/1.031 = 0.9971

So, Devon can buy about 99.71% of what he can buy today with his annual income after one year. In other words, he can buy slightly less than he can buy today, because inflation is greater than the rate at which his income is increasing.

Answer 2

Explanation:

After one year, Devon's income will have grown by 2.9%. However, because inflation is 3.1%, the purchasing power of his income will decrease. This means that Devon will be able to buy less than he could today.

To calculate how much Devon can buy with his annual income after one year, we can use the following formula:

Purchasing power = Income / (1 + inflation rate)

Substituting the values given in the problem:

Purchasing power after one year = Income / (1 + 0.031)

Purchasing power after one year = Income / 1.031

Therefore, Devon will be able to buy approximately 0.97 times (or 97% of) what he could buy with his income today. In other words, his purchasing power will have decreased by approximately 3%.