Question

I. Explain how inflation affects savings.

II. An economy produces two goods, x and y. A year ago the price of x was $4 and the price of y was $6. Today, the price of x is $8 and the price of y is $10. What happened to the nominal and the real value of good x? What happened to the nominal and real value of good y?

III. ‘Coronavirus stimulus checks are currently being distributed, and millions of Americans are eagerly awaiting their payment. Depending on one’s income levels, an individual could receive up to $1,200 (or $2,400 for married couples filing jointly), plus an additional $500 for each dependent under the age of 17.’

Katie Brockman, “Social Security Beneficiaries: Here’s When You’ll Get Your Stimulus Check”

https://www.fool.com/retirement/2020/04/27/social-security-beneficiaries-heres-when-youll-get.aspx

1. Using an appropriate diagram, explain using words, how the overall price level for goods and services adjusts to bring money supply and money demand into balance.

2. Briefly explain the relationship between how people choose to use this excess supply of money and the demand and the production of goods and services.

3. Does the injection of the money by the Fed affect the economy’s ability to supply goods and services? Why or why not.

Answer 1

I. Inflation refers to the continuous rise in prices of goods and services. Over time inflation will affect the value of our savings. It will reduce the value of savings by affecting our purchasing power. For example if you are saving $1000 and if there is inflation in future, $1000 will not buy the same amount of goods and services that you were buying before the onset of inflation. There will be reduction in the net worth due to changes in purchasing power. Even though banks will pay us interest, it may not be enough to offset the inflation.