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Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364

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BuyFindarrow_forward

Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364
Textbook Problem

The index number representing the price level changes from 110 to 115 in one year and then from 115 to 120 the next year. Since the index number increases by five each year, is five inflation rate each year? Is the inflation rate the same each year? Explain your answer.

To determine

To explain: Whether the inflation rate remains the same in each year.

Explanation

From the question we know, the index number changes from 110 to 115 in the first year and from 115 to 120 in the next year. This does not indicate that inflation rate is 5% because the inflation rate is calculated by percentage change and not by subtracting the given index numbers.

Let us calculate the inflation rate for the first year by the use of index number:

Inflation rate =115110110×100=5100×100=0.045×100=4.5%

Hence, the inflation rate in 4

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