Question

1. 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 coffee, one donut, and one newspaper year one, the basket costs $10.00. In year two, the price of the same basket is $9.00. From year one to year two, there is at an annual rate of In year one, $80.00 will buy baskets, and in year two, $80.00 will buy _ baskets. This example illustrates that, as the price level falls, the value of money

Answer 1

From year 1 to year 2 ,there is a deflation at a annual rate of 10%.

Deflation is decreasing of price level.because price decreased from 10 to 9 ,so it is deflation.

The rate of deflation=(9-10)/10]*100=-1/10]*100=-10%{ negitive sign shows deflation}

In year one 80$ buys 8 basket (80/10=8).

In year two 80$ buys 8.88 basket ( 80/9=. 8.8)

This shows Decrease in price level Increases the value of money.