Inflation and Purchasing Power
Inflation is a rise in the general price level over time.
When prices rise, the same amount of money buys less. Nominal return describes the change in money; real return also accounts for the change in the price level. A rise in the price of a single product is not by itself a measure of the whole economy.
100 ₪ bought a certain basket. If that same basket now costs 105 ₪, the same 100 ₪ is no longer enough for it.
Explain why keeping the same number of shekels does not necessarily preserve purchasing power.
Investor.gov · Risk and Return ↗Check your understanding
Prices rose and your money didn’t change. Purchasing power…
- Necessarily increased
- Decreased
- Is always the same
Answer and explanation
Decreased. The same amount can buy less.
Real return takes into account…
- The color of the bill
- Inflation
- Your birthday
Answer and explanation
Inflation. It looks at return relative to the change in the price level.
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