Question

Martha visits a departmental store and discovers that a box of exotic candles will cost her ten percent more than what she had paid six months ago. The increase in prices is same across the country. In this scenario, which of the following statements is true?
The departmental store is trying to earn profits by increasing the prices of its goods.


She has to pay twelve percent more than what she paid last month.


She will have immediate purchasing power if she had a pay raise to match the inflation.


The candles' subjective value increases with the increase in inflation.

Answer 1

Answer:

The answer is: She will have immediate purchasing power if she had a pay raise to match the inflation.  

Explanation:

Inflation can be explained as a general increase in the prices of goods or services over a certain period of time (in the whole country not only on one store). So the purchasing power of the currency will decrease inversely.

Assuming that the inflation rate of the whole country was 10% over the last six months, in order for Martha to be able to buy right now the same amount of goods and services she used to buy before, she would need a pay raise of 10% to match the inflation rate.

If only the candles´ supply was affected by inflation, to establish a pay raise that would balance her purchasing power you would need to calculate what percentage of Martha´s income the buying of exotic candles represent  .