Question

Attempts: Average: 13 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 tea, one biscuit, and one magazine. In r one, the basket costs $8.00 a inflation b- deflation 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 a-1.00%. b-1.25% c-1.43% d-12.50% e-14.29% a- 0.18 b-0.2 a- 0.18 b-0.2 In year one, $40.00 will buy c2.86 baskets, and in year two, $40.00 will buy 2.86baskets. This example illustrates that, as the price level falls, the value of money b- falls c-remains the same Grade It Now Save & Continue Continue without saving

Answer 1

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 $8.00.

In year two, the price of the same basket is $7.00. From year one to year two, there is b-deflation at an annual rate of d-12.50%

In year one, $40.00 will buy d-5 baskets, and in year two, $40.00 will buy e-5.71 baskets.

This example illustrates that, as the price level falls, the value of money a-rises.

Explanation:

Inflation is increase in the general price level and deflation is the decrease in the general price level.

Year 1 – Basket cost $8.00

Year 2 – Basket cost $7.00

There is decrease in the general price level. So, this is called deflation.

Growth rate = (Current price – Initial price/Initial price) * 100

Growth rate = (7-8/8) * 100 = (-1/8) * 100 = (-)12.5%

In year one, $40 will by you 40 / 8 = 5 baskets.

In year 2, $40 will by you 40 / 7 = 5.71 baskets.

Fall in the price level, increases the value of money.