Question

If the inflation rate doubles, does the percentage decrease in buying power also double? If not, is the new percentage decrease in buying power more than twice the old one or less than twice the old one? Interpret your answer.

Answer 1

Answer: It doubles

Step-by-step explanation:

Inflation erodes the value of a currency thereby reducing the purchasing power that customers have as they will only be able to buy less gods and services for the same amount as before.

An increase in inflation is directly proportional to a decrease in purchasing power which means that if the inflation rate doubles, the decrease in purchasing power doubles as well.

For instance, if inflation is 10%, the value of a dollar becomes 0.9c. If Inflation doubles to 20%, the dollar goes to 0.8c. Meanwhile the purchasing power would have gone from $1 to 0.8c which would translate to a 20% decrease.