Question

Abhijit deposits $100 in a bank account that pays an annual interest rate of 5 percent. A year later, Abhijit withdraws his $105. If deflation was 7 percent during the year the money was deposited, then Abhijit’s purchasing power has increased by 12 percent.

A. True
B. False

Answer 1

The statement is False. With deflation of 7 percent, Abhijit's purchasing power has decreased, not increased.

Step-by-step explanation:

The statement is False.

When Abhijit deposits $100 in a bank account with an annual interest rate of 5 percent, he earns $5 in interest after a year, bringing his total balance to $105. However, if deflation occurs at a rate of 7 percent during that year, the purchasing power of his money decreases. This means that his $105 is actually worth less in terms of goods and services due to the decrease in prices caused by deflation.

If Abhijit's purchasing power has increased by 12 percent, it would mean that his $105 can now buy more goods and services compared to before. However, with deflation of 7 percent, the opposite is true: the purchasing power of his money has decreased.