In the country of Kasnia, the price of copper increased from $6 per kilogram to $6.60 per kilogram during a time when the overall price level increased by 6 percent. During this period, what happened to the real price of copper?

Question

Quizplus · Accepted Answer

The overall price level increased by 6 percent, meaning that prices in Kasnia on average increased by 6 percent. Therefore, if the price of copper increased from $6 to $6.60, it increased by 10 percent (0.60/6). However, in terms of real price, meaning the price adjusted for inflation, we need to subtract the inflation rate from the nominal price increase. 6 percent inflation means that the buying power of the Kasnian currency decreased by 6 percent. Therefore, the real price increase of copper is only 10 percent - 6 percent = 4 percent lower. In other words, the real price of copper has decreased by about 4 percent.

In the Country of Kasnia, the Price of Copper Increased