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Chapter 6: Problem 12

If the price of, say, oranges has risen, does it follow that the price level has risen too? Explain your answer.

Short Answer

Expert verified
No, it does not automatically follow that a rise in the price of one good (such as oranges) means that the price level has risen. The price level is influenced by prices of all goods and services in the economy.

Step by step solution

01

Understand the price level

Firstly, we need to understand what the price level is. In economics, the price level refers to the average prices of goods and services in the economy. It is generally measured using a price index, such as the Consumer Price Index (CPI) or the GDP deflator, which looks at the prices of a 'basket' of goods and services purchased by a typical consumer or produced in the economy.
02

Analyze the effect of a price increase of a single good

Next, consider what happens when the price of a single good, say oranges, increases. Does the price level necessarily increase too? Well, it depends. If the price increase for oranges is offset by price decreases for other goods, then the price level might stay the same.
03

Conclusion

So, it does not automatically follow that a rise in the price of oranges (or any other individual good) means that the price level has risen. The price level is affected by changes in the prices of all goods and services in the economy, not just one.

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