Question

Suppose you have $1000 in savings and the current price level is 100. Suppose deflation pushes the price level down by 10 percent, what is the real value of your savings

Answer 1

The real value of your savings given the level of depreciation and the price levels is $1,111.

What is the real value of your savings?

Deflation is when there is a persistent decline in the general price levels. The price of goods and services become cheaper when there is a deflation. As a result the purchasing power or the real value of money increases.

The price level declines by 10% so the real value of the savings increases by 10%.

1000 / ( 1 - 0.1) = $1,111.

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