Question

In your own words, explain how the scenario of the car for sale demonstrates the decrease in the purchasing power of the dollar?

Answer 1

The scenario of the car for sale illustrates a decrease in the purchasing power of the dollar. The asking price for the car has risen significantly over the years, indicating that the same amount of dollars can now buy fewer goods or services.

Step-by-step explanation:

The decrease in the purchasing power of the dollar is evident when examining the historical context of the car's asking price. Suppose the car was initially priced at $20,000 a decade ago and is now listed at $30,000. Using the formula for calculating the inflation rate,

`\( \text{Inflation Rate} = \frac{\text{Current Price} - \text{Initial Price}}{\text{Initial Price}} * 100 \)`,

we find an inflation rate of

`\( (30,000 - 20,000)/(20,000) * 100 = 50\% \)`

This means that the cost of the car has increased by 50% over the specified period.

Moreover, the decrease in purchasing power can be attributed to inflation, where the general price level of goods and services rises, eroding the real value of the currency. Inflation diminishes the buying power of money, and consumers need more dollars to purchase the same goods or services they could have bought for less in the past. This phenomenon impacts individuals' ability to afford goods and services, as reflected in the higher asking price for the car.

In summary, the car's escalating price demonstrates the decline in the purchasing power of the dollar due to inflation. As prices rise over time, the value of a dollar diminishes, necessitating more dollars to acquire the same items, affecting consumers' overall buying capacity.