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 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 isdeflation at an annual rate of6.67% .

In year one, $120.00 will buy8.57 baskets, and in year two, $120.00 will buy8 baskets.

This example illustrates that, as the price level falls, the value of moneyrises .