Question

Suppose the price index was 110 in 2004, 120 in 2005, and 125 in 2006. Which of the following statements is correct? a. The economy experienced inflation between 2004 and 2005 and between 2005 and 2006. b. The inflation rate was positive between 2004 and 2005, and it was negative between 2005 and 2006. c. The inflation rate was higher between 2005 and 2006 than it was between 2004 and 2005. d. All of the above are correct.

Answer 1

Answer:

Option (a) is correct.

Explanation:

Given that,

Price index in the year 2004 = 110

Price index in the year 2005 = 120

Price index in the year 2006 = 125

Inflation rate refers to the rate at which the prices of goods increases from one year to the other.

Consumer price index indicates the inflation in a particular year.

Inflation between 2004 and 2005:

= (Price index in the year 2005 - Price index in the year 2004) ÷ Price index in the year 2004

= (120 - 110) ÷ 110

= 10 ÷ 110

= 0.0909 or 9.09%

Inflation between 2005 and 2006:

= (Price index in the year 2006 - Price index in the year 2005) ÷ Price index in the year 2005

= (125 - 120) ÷ 120

= 5 ÷ 120

= 0.0417 or 4.17%

Therefore, the inflation between 2004 and 2005 is higher than the inflation between 2005 and 2006.