Question

The price index in the first year is 110, in the second year is 100, and in the third year is 96. The economy experienced

Answer 1

Answer:

a. 9.1 percent deflation between the first and second years, and 4 percent deflation between the second and third years.

Explanation:

To calculate the rate of inflation/deflation, we have to divide by the oldest price index.

The second year, the variation of the price index was:

$\Delta PI/PI=\frac{PI_2-PI_1}{PI_1}=\frac{100-110}{110}=\frac{-10}{110}=-0.909=-9.1\%$

This means a 9.1% deflation.

The third year, the variation of the price index was:

$\Delta PI/PI=\frac{PI_3-PI_2}{PI_2}=\frac{96-100}{100}=\frac{-4}{100}=-0.04=-4\%$

This means a 4% deflation.