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:

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2.

3.

4.

5.

Question

Business

Wayne Guerra

30 June, 18:41

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.

+3

Answers (1)

Know the Answer?

Fisher Bradley · Answer 1

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