Question

From 1929 through the early 1930s, the prices of consumer goods actually decreased. Economists call this phenomenon deflation. The rate of deflation during this period was about 7% per year, meaning that prices decreased by 7% per year. To get a sense of what this rate would mean in the long run, let's suppose that this rate of deflation persisted over a period of 20 years.

What would be the cost after 20 years of an item that costs $400 initially? (Round your answer to the nearest cent.)
$ ______

Answer 1

9514 1404 393

Answer:

$93.70

Explanation:

The multiplier each year would be (1 -7%) = 0.93. After 20 years, the price would be multiplied by this value 20 times:

cost = $400 × 0.93^20 ≈ $93.70

After 20 years of 7% deflation, the cost would be $93.70.