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Inflation is defined as a positive change in the economy's general price level. This means that, on average, the cost of a representative basket of goods and services is increasing over a period of time.

Inflation: A Positive Change in the Price Level

An economic report for a country provides the following data on annual price changes for major categories in a representative consumer's budget: 

* Food: +4% 
* Housing: +3% 
* Transportation: -5% 
* Electronics: -2% 
* Healthcare: +6% 

A government official claims that because the prices of transportation and electronics have fallen, the overall cost of living has not increased. Based on the definition of a general price level, evaluate the official's claim. Is it likely that the economy has experienced a positive change in its general price level? Justify your reasoning.

Evaluating Price Level Changes

A news report states that the price of new cars has increased by 5% over the last year. A student concludes that this means the economy is experiencing a positive change in its general price level. Explain why this student's conclusion might be incorrect, even though the price of one type of good has risen.

Distinguishing Individual Price Changes from Inflation

An economy cannot be experiencing inflation if the prices of some goods and services are decreasing.

Consider an economy where a representative basket of goods contains 10 loaves of bread and 5 gallons of milk. In the first year, bread costs $2.00 per loaf and milk costs $4.00 per gallon. In the second year, the price of bread rises to $2.50 per loaf, while the price of milk falls to $3.80 per gallon. Based on this information, which statement accurately describes the change in the price level?

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