The price index was 120 in Year 1 and 126 in Year 2. What was the inflation rate?

Question

a.

7.2%
b.

5%
c.

105%
d.

6%

Answer 1

To calculate the inflation rate between Year 1 and Year 2 based on the price index, you can use the following formula:

\[ \text{Inflation Rate} = \left( \frac{\text{Price Index in Year 2} - \text{Price Index in Year 1}}{\text{Price Index in Year 1}} \right) \times 100 \]

Substituting the values:

\[ \text{Inflation Rate} = \left( \frac{126 - 120}{120} \right) \times 100 \]

Calculating the numerator:

\[ 126 - 120 = 6 \]

Now, substituting back into the formula:

\[ \text{Inflation Rate} = \left( \frac{6}{120} \right) \times 100 = 0.05 \times 100 = 5% \]

Therefore, the inflation rate is 5% (option b).