Question

Your grandmother tells you a dollar doesn’t go as far as it used to. She says the “purchasing power” of a dollar is much less than it used to be. Explain what she means. Try to use and explain terms like inflation and deflation in your answer.

Answer 1

Answer:

see below

Explanation:

Inflation refers to the gradual increase in the general prices of goods and services in the country over time. Increased economic activities in a country lead to an increase in the money supply,  which leads to inflation. Inflation results in a reduction in the purchasing power of a country's currency.

A currency losing its purchasing power means one unit of money will buy fewer items than it could in the previous period.  The inflation rate is measured using the consumer price index system. The system compares the price of a basket of consumer goods between different periods. An increase in the price of the basket means the currency will buy less of the basket, implying a decline in the currency strength.

Deflation is the opposite of inflation. Deflation is a decrease in prices. It results in the strengthening of a country's currency or increased purchasing power.