If inflation from year 1 to year 2 is r as a decimal, then one year-1 dollar has the same purchasing power as _____ year-2 dollars.
A)1 - r
B)r - 1
C)1 + r
D)2r

Question

Quizplus · Accepted Answer

If the inflation from year 1 to year 2 is r, then the purchasing power of one year-1 dollar decreases by r. This means that the one year-1 dollar is equivalent to 1-r year-2 dollars. To find the number of year-2 dollars that have the same purchasing power as one year-1 dollar, we need to add back the amount that was lost due to inflation, which is r. Therefore, one year-1 dollar has the same purchasing power as 1 + r year-2 dollars.

If Inflation from Year 1 to Year 2 Is R