Question

If the price index was 90 in Year 1, 100 in Year 2, and 95 in Year 3, then the economy experienced
a. 10 percent inflation between Years 1 and 2, and 5 percent inflation between Years 2 and 3.
b. 11.1 percent inflation between Years 1 and 2, and 5 percent inflation between Years 2 and 3.
c. 10 percent inflation between Years 1 and 2, and 5 percent deflation between Years 2 and 3.
d. 11.1 percent inflation between Years 1 and 2, and 5 percent deflation between Years 2 and 3.

Answer 1

To determine the inflation rates between the years, we can use the formula for calculating the inflation rate based on the price index:

\[
\text{Inflation Rate} = \left(\frac{\text{Price Index in Current Year} - \text{Price Index in Previous Year}}{\text{Price Index in Previous Year}}\right) \times 100\%
\]

Let's calculate the inflation rates.

1. **Between Year 1 and Year 2**:
- Price Index in Year 1: 90
- Price Index in Year 2: 100
\[
\text{Inflation Rate} = \left(\frac{100 - 90}{90}\right) \times 100\% = \left(\frac{10}{90}\right) \times 100\% \approx 11.1\%
\]

2. **Between Year 2 and Year 3**:
- Price Index in Year 2: 100
- Price Index in Year 3: 95
\[
\text{Inflation Rate} = \left(\frac{95 - 100}{100}\right) \times 100\% = \left(\frac{-5}{100}\right) \times 100\% = -5\%
\]

This indicates that there was a 5% deflation between Year 2 and Year 3.

Thus, the results are:
- 11.1 percent inflation between Year 1 and Year 2
- 5 percent deflation between Year 2 and Year 3

The correct answer is **d. 11.1 percent inflation between Years 1 and 2, and 5 percent deflation between Years 2 and 3.**