Question

Question 3 0.25 pts Table 5: Price Index for Macroland Year 1 Price index 140 Year 2 150 Year 3 158 Year 4 162 Table above provides the price index for Macroland for four years. What was the inflation rate in Macroland during year 4? a. 5.7% b.2.5% O c. 4.0% d. 15.7%

Answer 1

The rate of inflation is the percentage change in the price level. That is how much we need to spend extra to purchase the same basket of good that we purchased in previous year.

Given the price index we can calculate rate of inflation using the following formula,

rate of inflation =(price index in year2 - price index in year1)/price index in year 1 x 100

That is the rate of inflation is equal to the percentage change in the price index.

Here the price index are taken from consecutive years, that if need to calculate the rate of inflation in year 4 then we will take the price index of year 3 and 4.

now using the values from the table of price index of year 3 and 4, we get

= (162 - 158)/158 x 100

= 4/158 x 100

= 0.025 x 100

= 2.5%

Thus the correct answer for this question must be option b, 2.5%.

The rate of inflation in year 4 is 2.5%.