Answered: Does the purchasing power of the dollar…

Economics Today and Tomorrow, Student Edition

1st Edition

ISBN:9780078747663

Author:McGraw-Hill

Publisher:McGraw-Hill

Chapter18: Trading With Other Nations

Section18.2: Financing World Trade

Problem 4R

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Does the purchasing power of the dollar change over time due to inflation?

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Purchasing power (PP) of a dollar is the real amount of goods & services that could be brought using a dollar. If the real amount of goods and services that could be brought is higher then we say that the dollar has high PP and vice versa.

In the presence of inflation, we know that the price level increases, and if the level of price increases then by using a dollar we can buy a fewer amount of goods and services because with an increase in prices the goods and services become costlier, as a result, the PP falls.

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