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 cup of coffee, one donut, and one newspaper. In year one, the basket costs $8.00.

In year two, the price of the same basket is $9.00. From year one to year two, there isdeflation at an annual rate of11.11% .

In year one, $16.00 will buy baskets, and in year two, $16.00 will buy baskets.

This example illustrates that, as the price level rises, the value of money .