Define inflation. Assume that you live in a simple economy in which only three goods are produced and traded: fish, fruit, and meat. Suppose that on January 1, 2010, fish sold for $2.50 per pound, meat was $3.00 per pound, and fruit was $1.50 per pound .At the end of the year, you discover that the catch was low and that fish prices had increased to $5.00 per pound, but fruit prices stayed at $1.50 and meat prices had actually fallen to $2.00. Can you say what happened to the overall “price level”? How might you construct a measure of the “change in the price level”? What additional information might you need to construct your measure?
Answers
Answer:
inflation refers to steady increase in general price
level.
Step 1 of 4 A As you know that, the inflation defined as an increase in the overall price level, while deflation is a decrease in the overall price level. The inflation rate is the percentage rate of change in price index. Consumer price index (CPI) is a price index computed each month by the Bureau of Labor Statistics using a bundle that is representative of the "market basket purchased monthly by the consumer. CPI is a fixed-weight price index (with the current base period 1982–1984). Comment Step 2 of 4 A As given that in a simple economy produce and traded three goods, which are as fish sold for $2.50 per pound, meat was $3.00, and fruit was $1.50, at the starting of the year. At end of the year 2010, prices of fish increased to $5.00, fruit constant, and meat price fallen to $2.00. From this, the people will say that the price of the fish has gone up. Comment Step 3 of 4 A To construct a measure of the change in the price level we need to compute the consumer price index (CPI). It compares the price of a fixed bundle of goods in one year with the price.