Suppose the rate of inflation this year is 4.5%. What is the percentage decrease in the buying power of a dollar?

Question

Quizplus · Accepted Answer

The buying power of a dollar decreases at the same rate as the inflation rate, which is 4.5%. However, to calculate the percentage decrease in buying power, you use the formula for percentage change: [(New Value - Old Value) / Old Value] * 100. Here, the "New Value" is what $1 can buy after inflation, and the "Old Value" is what $1 could buy before inflation. If inflation is 4.5%, $1 now buys 4.5% less than it did before, so the direct decrease in buying power is also 4.5%. However, the correct calculation to find the exact decrease in buying power should consider the relative change in value, which is calculated as 1/(1+inflation rate) - 1. For a 4.5% inflation rate, this calculation is 1/(1+0.045) - 1, which equals approximately -0.043, or -4.3% when converted to a percentage. This reflects a slightly more nuanced understanding of how inflation affects buying power, taking into account the proportional change rather than a direct subtraction of percentages.

Suppose the Rate of Inflation This Year Is 4