Suppose the value of the CPI is 1.100 in year one, 1.160 in year two, and 1.270 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, 1.160 in year two, and 1.270 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 increasing because the rate of change is increasing from year one to year two: (1.160 - 1.100)/ 1.1 = 0.0545 or 5.45 percent and (1.270 - 1.160)/ 1.160 = 0.0948 or 9.48 percent. The relative price of computers is decreasing because its 3 percent price change is less than the inflation rate in both years.

Suppose the Value of the CPI Is 1