Question

Suppose the price level reflects the number of dollars needed to buy a basket of goods containing one cup of coffee, one donut, and one newspaper. In year one, the basket costs $9.00. In year two, the price of the same basket is $8.00. From year one to year two, there is (deflation/inflation (1)) at an annual rate of (???? (2)). In year one, $72.00 will buy (?????(3)) baskets, and in year two, $72.00 will buy (?????(4)) baskets. This example illustrates that, as the price level falls, the value of money (rises/falls/remains the same (5)).

Answer questions:

1.

2.

3.

4.

5.

Answer 1

Answer:

1) deflation 2)11.1%      3) 8 baskets    4)9 baskets 5) rises

Explanation:

1) since price of basket of goods decreased, it is deflation

2) deflation rate= (price in year 1- price in year 2)/ price in year 1 × 100

                      = (9-8)/9×100

                      = 11.1%

3) number of baskets in year 1 from $72= 72/9 = 8 baskets

4) number of baskets in year 2 from $72= 72/8= 9 baskets

5) when deflation occurs value of money rises