Question

If a retired worker receives a fixed income of $45,000 a year from a pension plan, and there is a fall in the economy this year resulting in deflation, then _____.
A. the purchasing power of his fixed income would rise compared to last year
B. the purchasing power of his fixed income would be unknown without a better idea of the price level
C. the purchasing power of his fixed income would fall compared to last year
D. the purchasing power of his fixed income would remain the same compared to last year

Answer 1

Answer:

A. the purchasing power of his fixed income would rise compared to last year

Explanation:

Deflation is an economic situation where there is a general decline in prices. Deflation is as a result of a low rate of inflation or inflation is negative. Therefore, deflation is the exact opposite of inflation. At inflation, currencies lose their purchasing power, but at deflation, they gain buying power.

A reduction in the supply of money and credit in the economy causes deflation. The implication is that there will be many sellers or suppliers verses very few buyers, which leads to unhealthy competition amongst the sellers.  When the supply is high, and demand is low prices tend to decline.

With a fixed income of $45,000, the workers will have a higher purchasing power as prices will decline.

Answer 2

Answer:

A

Explanation:

When deflation happens, there is a reduction of the general level of prices in an economy. As a result, the purchasing power of the fixed income of the retired worker will increase compared to last year.