Of the following sequences of price levels, which correctly represents a 5 percent inflation rate?
A)100, 105, 105, 105
B)100, 105, 110, 115
C)95, 100, 105, 110
D)100, 105, 110.25, 115.76
E)100, 100, 100, 100

Question

Quizplus · Accepted Answer

A 5 percent inflation rate means that the price level increases by 5% each year. Starting from 100, a 5% increase leads to 105 in the first year. In the second year, the price increases by 5% of 105, which is 5.25, leading to 110.25. In the third year, it increases by 5% of 110.25, which is approximately 5.51, leading to approximately 115.76. This compound growth is characteristic of a constant inflation rate.

Of the Following Sequences of Price Levels, Which Correctly Represents