1. Recall the example of a prisoner-of-war camp in World war II. In the camp, cigarettes were used as a means of exchange instead of money. The following table is exchange rates in a building, say Building A. Then, answer the following questions: [MI]: Which item is most expensive? a. Milk b. Jam c. Sugar d. Same e. All are disvalued items The price per unit Milk 3 cigarettes [M2]: When you have a unit of sugar, how many units of Jam can you exchange? Jam 4 cigarettes a. a quarter of unit b. a half of unit Sugar 2 cigarettes c. one unit e. two units d. one and a half unit [M3]: Suppose there 60 cigarettes in Building A and each of goods are traded 20 times. Then, how many rotations is the transaction velocity of money according to the quantity theory of money by Prof. Fisher? Answer the number in natural numbers.

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Inflation and Purchasing Power Theory

In economic terms, Inflation refers to the increase in the costs of various commodities which are used in daily lifestyle like food, clothes, transport, etc. over a specific time. It may lead to a fall in the purchasing power of the people and also affects the exchange rate of the currency because of the price increase. As the purchasing power falls the unit of the currency in the economy falls. When the prices of the commodities are decreased, then the purchasing power of the consumers will rise, then it will lead to deflation and changes the currency of the base economy to that of the foreign economy which will lead to change in exchange rates.