Question

Suppose the price level and value of the U.S. Dollar in year 1 are 1 and $1, respectively. Instructions: Round your answers to 2 decimal places. a. If the price level rises to 1.25 in year 2, what is the new value of the dollar? b. If, instead, the price level falls to 0.50, what is the value of the dollar?

Answer 1

Answer:

Consider the following calculations

Explanation:

(a) Price level = 1.25

Value of dollar = 1/Price level = 1/1.25 = 0.8

Thus,

The new value of the dollar is $0.8

(b)  Price level = 0.50

Value of dollar = 1/Price level = 1/0.50 = 2

Thus,

The new value of the dollar is $2.

Answer 2

Answer:

a. When the price level rises to 1.25 in year 2, the value of money reduces to $0.80

b. When the price level drops to 0.50, the value of money rises to $2.00

Explanation:

Topic: Price Level and Value of Money

The basic causal relationship between the price level and the value of money is that as the price level goes up, the value of money goes down

Value of Money is calculated using the following formula:

$Value of Money = \frac{1}{Price Level}$

Given

In year 1 are 1 and $1, respectively

a. When Price Level Rises to 1.25 in year 2

The new value of dollar is calculated using

$Value of Money = \frac{1}{Price Level}$

By Substituting 1.25 for Price Level, we have

$Value of Money = \frac{1}{1.25}$

$Value of Money = 0.8$

$Value of Money = 0.80$ to two decimal places.

Hence, when the price level rises to 1.25 in year 2, the value of money reduces to $0.80

b. When Price level falls to 0.50

The new value of dollar is calculated using

$Value of Money = \frac{1}{Price Level}$

By Substituting 0.50 for Price Level, we have

$Value of Money = \frac{1}{0.50}$

$Value of Money = 2$

$Value of Money = 2.00$ to two decimal places.

Hence, when the price level drops to 0.50, the value of money rises to $2.00