Krugman's Economics For The Ap® Course
Krugman's Economics For The Ap® Course
3rd Edition
ISBN: 9781319113278
Author: David Anderson, Margaret Ray
Publisher: Worth Publishers
Question
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Chapter 2, Problem 2FRQ
To determine

The question requires us to define inflation and give the reason why a rise in price of donuts doesn’t imply inflation.

Expert Solution & Answer
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Explanation of Solution

An increase in the general price level of goods and services is termed inflation in an economy, for example, suppose in period 1, a person is purchasing a basket of goods at $100 per basket. Later, in period 2, the person buys the same basket of goods at $120 then this hike in the price of the basket represents the inflation in the market.

An increase in the price of donuts doesn’t indicate inflation because a change in the prices of a few goods only changes the opportunity cost of purchasing those goods. So, a change in the price of one or a few items doesn’t constitute inflation or deflation in the economy.

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