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Suppose the price level reflects the number of dollars needed to buy a basket of goods containing one can of soda, one bag of chips, and one comic book. in year one, the basket costs $10.00. in year two, the price of the same basket is $9.00. from year one to year two, there is

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In this case, there would be deflation at the annual rate of 10%. This is because the value of the basket has become less, and is a rate of $1/$10 less for year two than it was during the first year. When a basket is worth less, deflation has taken place.

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