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 $10.00.
In year two, the price of the same basket is $9.00. From year one to year two, there is 1) ______ (A) inflation (B) Deflation at an annual rate of 2) _______ (A)-10.00% (B) -1.11% (C) 1.00% (D) 11.11% .


In year one, $80.00 will buy 3) ______ (A) .11 (B) .13 (C) 4.44 (D) 8 (E) 8.89 baskets, and in year two, $80.00 will buy 4) ______ (A) .11 (B) .13 (C) 4.44 (D) 8 (E) 8.89 baskets.


This example illustrates that, as the price level falls, the value of money 5) _______ (A) Rises (B) Falls (C) Remains the same .

Answer 1

Answer:

1. B) Deflation

2. A)-10.00%

3. D) 8 

4. E) 8.89 baskets.

5. (A) Rises

Explanation:

Deflation is a fall in general price levels. When deflation occurs, the value of money increases: The purchasing power of money increases.

The deflation rate = ( this year price level - last year's price level ) / last year's price level

Deflation rate =( $9 - $10) / $10 = -10%

In the previous year, $80 would purchase $80 / $10= 8 baskets

This year, $80 would purchase $80 / $9= 8.89 baskets

Inflation is a rise in the general price levels.

I hope my answer helps you