Suppose the value of the CPI is 1.100 in year one, 1.122 in year two, and 1.133 in year three. Assume also that the price of computers increases by 3 percent between year one and year two, and by another 3 percent between year two and year three. The price level is increasing, the inflation rate is ________, and the relative price of computers is ________.
A)decreasing; increasing
B)increasing; increasing
C)decreasing; decreasing
D)increasing; decreasing

Question

Suppose the value of the CPI is 1.100 in year one, 1.122 in year two, and 1.133 in year three. Assume also that the price of computers increases by 3 percent between year one and year two, and by another 3 percent between year two and year three. The price level is increasing, the inflation rate is ________, and the relative price of computers is ________.
A)decreasing; increasing
B)increasing; increasing
C)decreasing; decreasing
D)increasing; decreasing

Quizplus · Accepted Answer

The inflation rate is decreasing because the rate of change is falling from year one to year two: (1.122 - 1.100)/ 1.122 = 0.02 or 2 percent versus (1.133 - 1.122)/ 1.122 = 0.01 or 1 percent. The relative price of computers is increasing because its price change of 3 percent exceeds inflation rate in both years.

Suppose the Value of the CPI Is 1