Suppose the price level and value of the dollar in year 1 are 1 and $1, respectively.

Instructions: Round your answers to two decimal places.

a.If the price level rises to 1.40 in year 2, what is the new value of the dollar?

$

b.If instead the price level had fallen to 0.80, what would have been the valueof the dollar?

$

c.What generalization can you draw from your answers?

multiple choice

• The amount a dollar will buy varies inversely with the price level.
• The amount a dollar will buy varies directly with the price level.
• The price level has no effect on the amount a dollar will buy.