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 l, 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 a measure of the change in the price level? What additional information might you need to construct your measure? 

Suppose that people consume only three goods as shown in this table:

1. What is the percentage change in the price of each of the three goods?

2. Using a method similar to the consumer price index, compute the percentage change in the overall price level.

3. If you were to learn that a bottle of Gatorade increased in size from 2011 to 2012, should that information affect your calculation of the inflation rate? If so, how?

4. If you were to learn that Gatorade introduced new flavours in 2012, should that information affect your calculation of the inflation rate? If so, how?

If an economy experiences deflation, then

A. the overall price level is rising but not as quickly as it did in the previous year.

B. the prices of consumer goods are decreasing while the prices of raw materials are increasing.

C. the overall price level is declining.

D. the overall price level is increasing.

E. the prices of all goods in the economy are decreasing.

Suppose that people consume only three goods, as shown in this table:

Compute the percentage change in price for each of the three goods.

Using a method similar to that used to calculate the consumer price index, the percentage change in the overall price level is __________.