Imagine you own a retail mail order business. You produce your catalog, where items and prices are listed, in January and you use the same catalog all year. The central bank in your country increases the money supply by an amount to cause inflation to average one percent each month. Ignoring any seasonality in sales (like the holiday season), what should happen to your sales as the year progresses and why?
What will be an ideal response?
As the year progresses sales should increase. Each month, items are becoming one percent cheaper in real terms since the nominal prices stated in the catalog are not changing. By December the products are approximately twelve percent less expensive than when the catalog was first issued. This is an example of where inflation makes separating a true increase in demand for goods from a general increase in prices difficult.
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a. 8 b. 15 c. 20 d. 40 e. 160
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