Suppose the value of the consumer price index (CPI)is 110 in year 1,116 in year 2,and 127 in year 3.Assume also that the price of computers increases by 3% between year 1 and year 2,and by another 3% between year 2 and year 3.The price level is increasing,the inflation rate is _______,and the relative price of computers is _________.

Question

Quizplus · Accepted Answer

The inflation rate can be calculated by (CPI in year 2 - CPI in year 1) / CPI in year 1, which is (116 - 110) / 110 = 5.45%. Similarly, the inflation rate between year 2 and year 3 is (127 - 116) / 116 = 9.48%. Therefore, the price level is increasing over time. 
The relative price of computers can be calculated by dividing the price of computers by the overall CPI. In year 1, the relative price of computers is 100% (since we're using year 1 as the base year). In year 2, the relative price of computers is 103% (due to the 3% increase in their price). In year 3, the relative price of computers is 107.48% (due to another 3% increase). Therefore, the relative price of computers is increasing over time, indicating that they are becoming relatively more expensive compared to other goods and services.

Suppose the Value of the Consumer Price Index (CPI)is 110