The question requires us to define inflation and give the reason why a rise in price of donuts doesn’t imply inflation.
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
Chapter 2 Solutions
Krugman's Economics For The Ap® Course
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