Question

39. Suppose that going forward inflation is 5% per year. How long will it take for the price level to double? ______.

40. Refer to your answer to question 39. If you want to maintain your purchasing power over that time period, your nominal income must increase annually by what percent? ________.

Answer 1

Question 39

Inflation rate per year = 5%

In order to calculate the number of years in which price level will double, we have to use Rule of 70.

Calculate the number of years in which price level would double -

Number of years = 70/Inflation rate per year

Number of years = 70/5 = 14

It will take 14 years for the price level to double.

Question 40 -

Purchasing power can be kept constant if the increase in nominal income equals the inflation rate.

Annual inflation rate is 5%.

So,

In order to maintain the purchasing power, nominal income must increase annually by 5 percent.