1. The level of prices and the value of money Suppose the price level reflects the number of dollars needed to buy a basket of goods containing one can of seltzer, one bag of pretzels, and one shuttle ride. 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 deflation at an annual rate of 6.67% In year one, $120.00 will buy 8 baskets, and in year two, $120.00 will buy 8.57 baskets. This example illustrates that, as the price level falls, the value of money rises

1. The level of prices and the value of money Suppose the price level reflects the number of dollars needed to buy a basket of goods containing one can of seltzer, one bag of pretzels, and one shuttle ride. 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 deflation at an annual rate of 6.67% In year one, $120.00 will buy 8 baskets, and in year two, $120.00 will buy 8.57 baskets. This example illustrates that, as the price level falls, the value of money rises

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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14. If the nominal interest rate is 8% and the inflation rate is 3%, the real interest rate A) 11% B) 5% C) -5%. D) 8/3 = 2.67% E) cannot be determined from the information given %3!
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