The level of prices and the value of money Suppose the price level reflects the

Question

The level of prices and the value of money Suppose the price level reflects the number of dollars needed to buy a basket of goods containing one cup of tea, one biscuit, and one magazine. In year one, the basket costs dollar 10.00. In year two, the price of the same basket is dollar 9.00. From year one to year two, there is at an annual rate of In year one, dollar 80.00 will buy baskets, and in year two, dollar 80.00 will buy baskets. This example illustrates that, as the price level falls, the value of money

Explanation / Answer

Deflation rate = - [ ( 9 - 10 / 10 ) * 100% = - 10% thus

there is Deflation at an annual rate of 10% .

in year one , $80 will buy 8 Baskets . and in year 2, $80 will buy 8.88 Baskets.

The value of money "RISES" as the price level falls because then we can buy more baskets with the same amount of money.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.