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

Question

Quizplus · Accepted Answer

A 5 percent inflation rate means that prices increase by 5 percent each year. Starting with 100, a 5 percent increase leads to 105 in the first year. In the second year, a 5 percent increase on 105 (which is 5.25) leads to 110.25. In the third year, a 5 percent increase on 110.25 (which is 5.5125) leads to approximately 115.76. This compounding effect is accurately represented in option D.

Of the Following Sequences of Price Levels, Which CORRECTLY Represents