Suppose the value of the CPI is 1.100 in year one, 1.210 in year two, and 1.331 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)increasing; increasing
B)constant; increasing
C)constant; decreasing
D)increasing; decreasing

Question

Suppose the value of the CPI is 1.100 in year one, 1.210 in year two, and 1.331 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)increasing; increasing
B)constant; increasing
C)constant; decreasing
D)increasing; decreasing

Quizplus · Accepted Answer

The inflation rate is constant because the rate of change is the same in both years: (1.210 - 1.100)/ 1.100 = = 0.1 or 10 percent and (1.331 - 1.210)/ 1.210 = 0.1 or 10 percent. The relative price of computers is decreasing because its 3 percent rate of price change is less than the inflation rate in both years.

Suppose the Value of the CPI Is 1