Question on price level

Question

Assume the price level and value of the dollar in year 1 are 1.0 and $1.00, respectively. If the price level increases to 1.25 in year 2, determine the new value of the dollar? If somewhat the price level had drop to .50, estimate the value of the dollar? What generalization can you draw through your answer?

Answer 1

In the primary case, the value of the dollar (in year 2, relative to year 1) is $.80 (= 1/1.25); into the second case the value is $2 (= 1/.50). Generalization: the price level & the value of the dollar are inversely associated.