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 can of soda, one bag of chips, and one comic book. In year one, the basket costs $8.00. In year two, the price of the same basket is $7.00. From year one to year two, there is at an annual rate of In year one, $40.00 will buy baskets, and in year two, $40.00 will buy baskets. This example illustrates that, as the price level falls, the value of money

Answer 1

Answer 1

From Year one to year two, there is a deflation at an annual rate of 12.5%

In year one, $40 will buy 5 baskets, and in year two, $40 will buy 5.7 baskets.

This example illustrates that, as the price level falls, the value of money increases.

Reason:

When the overall price level decreases so that inflation rate becomes negative, it is called deflation. We are able to buy more number of baskets due to fall in prices from year 1 to year 2.

Answer 7

Cost of Inflation

Reason:

The inflation is considered to be bad for an economy mainly because it destroys the purchasing power of the money.