brightoolhub. Français

Economics · 05 / 06

Inflation and purchasing power

Final-year concepts · Worked example and 4 exercises with solutions, at your pace.

Need a foundation?Fractions: share the same wholeProportionality and percentages
UnderstandSee an exampleGuided exercise3 progressive challenges

The principle, simply

Inflation is growth in a general price index over a period. Purchasing power depends on income and accessible prices; higher nominal income need not mean real growth. In an index model, real factor is nominal factor divided by price factor. Individual households may differ from the average index.

r=1.05/1.03-1
THE PICTURE TO REMEMBERInflation and purchasing power
  1. 01Price index
  2. 02Nominal income
  3. 03Factor ratio
  4. 04Real change

WORKED EXAMPLE

From principle to reasoning

Income +5% and prices +3% gives 1.05/1.03≈1.0194, or +1.94%; subtracting rates is approximate.

Solve a problem in this subject

  1. Define the indicator

    Specify quantity, population, period and unit. Distinguish level, change, rate of change and percentage points.

  2. Read or calculate

    Identify denominator and comparison base. From 20% to 25% is +5 percentage points but a 25% relative increase.

  3. Explain a mechanism

    Show steps connecting a proposed cause to its effect. Separate model, assumptions and evidence; correlation alone is insufficient.

  4. Discuss with evidence

    Use a precise example and limitations. Averages conceal distributions; nominal measures include price effects.

YOUR TURN

01 · Try before checking

Income +2%, prices +4%: does purchasing power rise?

One hint

Compare 1.02/1.04 with one.

Reveal and understand the solution

Factor ≈0.9808, a 1.92% decline under this index model.

Compare method, conditions and answer; identify the exact part to revisit.

IMPROVE THROUGH PRACTICE

Three additional challenges with solutions

Start with the first challenge. Write your method before opening a hint; use the solution to find the first step that needs work.

Reflect after practising
02 · Recognise and understandLink to this exercise

A basket rises from €100 to €104. Find its inflation rate.

A hint to get started

Compare the new price with the original.

Step-by-step solution
  1. (104 − 100)/100 = 0.04.
  2. The rate is 4%.
  3. This describes this basket; a general index uses defined items and weights.

Which step did you miss? Retry without help, then explain why the method works.

03 · Apply the methodLink to this exercise

Nominal income rises 5% and prices 3%. Find exact real change.

A hint to get started

Divide the nominal factor by the price factor.

Step-by-step solution
  1. Real factor = 1.05/1.03.
  2. Real growth is about 1.94%.
  3. 5 − 3 = 2% is an approximation, not the exact formula.

Which step did you miss? Retry without help, then explain why the method works.

04 · Go furtherLink to this exercise

Inflation falls from 6% to 2%. Are prices falling?

A hint to get started

Separate a lower rate from a negative rate.

Step-by-step solution
  1. Prices still rise while the rate is positive.
  2. They rise more slowly: disinflation.
  3. A falling general price level would mean negative inflation.

Which step did you miss? Retry without help, then explain why the method works.

The trap to avoid

Lower inflation can mean prices still rising more slowly, not falling.

Without notes, can you…

  • Explain the principle in your own words?
  • Rebuild the diagram and its connections?
  • Solve the exercise and justify the method?

Choosing a state saves it in this browser. This is your assessment, not a grade.

Next chapter My notebook