Suppose the price index in 2004 was 100;the price index in 2005 was 118;and the inflation rate between 2005 and 2006 was lower than it was between 2004 and 2005.This means that

Question

Quizplus · Accepted Answer

To determine the price index in 2006, we need information about the inflation rate from 2005 to 2006. Since the inflation rate between 2004 and 2005 was positive (18%), the increase in prices would have resulted in a price index higher than 118 in 2005. Therefore, we can assume that the base year (2004) had a lower price level than the actual index of 100. To calculate the price index in 2006, we need to know if the inflation rate was lower than the previous year (2004-2005). The inflation rate from 2004 to 2005 was 18%, so if the price index in 2006 increased by the same percentage, it would be 139.24 (118 x 1.18). Therefore, the correct answer is C.

Suppose the Price Index in 2004 Was 100;the Price Index