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9. 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 latte, one scone, and one bus trip. In year one,
the basket costs $11.00.
In year two, the price of the same basket is $10.00. From year one to year two, there is
at an annual rate of
In year one, $55.00 will buy baskets, and in year two, $55.00 will buy baskets.
This example illustrates that, as the price level falls, the value of money