Question

Suppose the price level in year 2016 is 100 and $100 buys 100 notebooks that year....

Suppose the price level in year 2016 is 100 and $100 buys 100 notebooks that year. If the price level rises to 125 in year 2017, what is the new value or purchasing power of the dollar? If, instead, the price level falls to 80, what is the value or purchasing power of the dollar? What relationship do you find between the U.S. price level and the value of the dollar?

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Answer #1

Answer - Price level = currency value / goods in market * 100

On the basis of this formula , if the price level is increased to 125 , the value of the currency will fall to $ 125 per 100 notebooks. This means that the purchasing power will fall as now $ 100 will not yield 100 books .

If the price level is decreased to 80 , the value of currency will rise to $ 80 per 100 notebooks. The purchasing power will rise.

Through this we can conclude that there is inverse relationship between the price level and the value of currency.

With rise in price level , value of currency falls and vice a versa

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