Question

Leticia made $100,000 in 2016 and inflation on consumer goods averaged around 2% during that year. As a result of the inflation, Leticia...

Options:
A) Will automatically get a 2% raise from her employer.
B) Lost purchasing power.
C) Qualifies for government assistance.
D) Has increased her production possibilities.

Answer 1

Due to inflation, Leticia lost purchasing power because her income remained the same while prices increased. To estimate Rosalie's buying power in today's dollars, we use the formula FV = PV / (1 + r)^n with an inflation rate of 6% over 16 years.

Step-by-step explanation:

As a result of the inflation, Leticia lost purchasing power. Inflation means that the general price level of goods and services in an economy increases over time. If Leticia's income remains the same while the cost of goods and services rises, she will not be able to buy as much with her money as she previously could. For Rosalie the Retiree, looking at the rise in the price level over 16 years will help us understand the real value of her one-time $20,000 payment upon retirement given a 6% inflation rate.

To calculate the loss in purchasing power, we use the formula to estimate future value with inflation: FV = PV / (1 + r)^n, where FV is future value, PV is present value, r is the inflation rate, and n is the number of years. Therefore, the buying power of the future payment is FV = $20,000 / (1 + 0.06)^16.