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QUESTION:
Suppose the price level reflects the number of dollars needed to buy a basket of goods containing one energy drink, one egg sandwich, and one bike rental. In year one, the basket costs $15.00.
In year two, the price of the same basket is $14.00. From year one to year two, there is    at an annual rate of    .
In year one, $120.00 will buy    baskets, and in year two, $120.00 will buy    baskets.
This example illustrates that, as the price level falls, the value of money   

ANSWER:

Suppose the price level reflects the number of dollars needed to buy a basket of goods containing one energy drink, one egg sandwich, and one bike rental. In year one, the basket costs $15.00.
In year two, the price of the same basket is $14.00. From year one to year two, there isdeflation  Correct at an annual rate of6.67%  Correct .
Points:
1 / 1
In year one, $120.00 will buy8  Correct baskets, and in year two, $120.00 will buy8.57  Correct baskets.
Points:
1 / 1
This example illustrates that, as the price level falls, the value of moneyrises  Correct .
Points:
1 / 1
Close Explanation
Explanation:
An increase in the overall level of prices is called inflation. Negative inflation, or a decrease in the overall level of prices, is called deflation. The percentage change in the price level from year one to year two is calculated as follows:
Inflation Rate = 100×$14.00−$15.00$15.00
 = 100×−$1.00$15.00
 = −6.67%
In year one, $120.00 can purchase $120.00$15.00 per basket=8 baskets. In year two, $120.00 can purchase $120.00$14.00 per basket=8.57 baskets. Notice that $120.00 purchases fewer baskets in year one. As the price level falls from year one to year two, the value of money rises.

Posted by Cleveland on September 10, 2024
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