Suppose the value of the CPI is 1.10 in year one, 1.16 in year two, and 1.27 in year three.Assume also that the price of computers increases by three per cent between year one and year two, and by another three per cent between year two and year three.The price level is increasing, the inflation rate is _______, and the relative price of computers is _________.

Question

Quizplus · Accepted Answer

The inflation rate is calculated as the percentage increase in the CPI from one year to the next. Therefore, the inflation rate between year one and year two is [(1.16-1.10)/1.10] x 100% = 5.45%, and the inflation rate between year two and year three is [(1.27-1.16)/1.16] x 100% = 9.48%. Since the inflation rate is increasing, the price level is also increasing. Furthermore, the relative price of computers is decreasing because the price of computers is increasing at a slower rate than the overall price level.

Suppose the Value of the CPI Is 1