Question

Decide whether the following statement makes sense (or is clearly true) or does not make sense (or is clearly false). Explain your reasoning When we chart the price of milk in 1995 dollars we find that it has become slightly more expensive, but when we chart it in 1975 dollars we find that it has become cheaper Choose the correct answer below.

A. The statement makes sense because 1995 dollars are worth more than 1975 dollars:
B. The statement does not make sense because prices always rise with time:
C. The statement does not make sense because the same trend would be seen regardless of what kind of dollars are used.
D. The statement makes sense because 1975 dollars are worth more than 1995 dollars.

Answer 1

The statement that milk appears to have become cheaper when charted in 1975 dollars but more expensive in 1995 dollars makes sense because 1975 dollars have more purchasing power than 1995 dollars due to inflation. This reflects the general decrease in the value of money over time.

Step-by-step explanation:

You have asked whether it makes sense that when we adjust the price of milk to 1995 dollars, it appears to have become slightly more expensive, but when adjusted to 1975 dollars, it appears to have become cheaper. The correct answer is D: The statement makes sense because 1975 dollars are worth more than 1995 dollars. This is due to the concept of inflation, which refers to the general increase in prices and fall in the purchasing value of money over time.

Inflation means that a dollar in the past had more purchasing power than a dollar today. When adjusting historical prices for inflation to compare them over time, we use a base year as a reference point. If we use a year like 1975, which is much earlier than 1995, the value of a dollar was higher than in 1995 because there has been less time for inflation to decrease its value. Therefore, if the price of milk when adjusted for inflation seems cheaper in 1975 dollars compared to 1995 dollars, it indicates that the increase in the price of milk over time has been outpaced by the rate of inflation between 1975 and 1995.

However, it's also important to remember that inflation is an aggregate measure affecting all prices in an economy, not just the price of milk. Various economic factors, such as supply and demand, production costs, and market competition, also play significant roles in determining prices.