Answer: The answer is as follows:
Explanation:
Price of basket in year one = $8
Price of basket in year two = $7
So, from year one to year two there is a fall in the price level which means that there is deflation in the economy at an annual rate of :
[tex]\frac{P_{2} -P _{1}}{P_{1} } \times 100[/tex]
= [tex]\frac{7 - 8}{8} \times 100[/tex]
= -12.50%
In year one, $40 will buy [tex]\frac{40}{8}[/tex] = 5 Baskets
In year two, $40 will buy [tex]\frac{40}{7}[/tex] = 5.71 Baskets
Value of money = [tex]\frac{1}{price\ level}[/tex]
Hence, this example illustrates that, as the price level falls, the value of money increases.
