Question

The price index was 150 in the first year, 142.5 in the second year, and 138.2 in the third year. The economy experienced:________

a. 5.0 percent deflation between the first and second years, and 3.0 percent deflation between the second and third years.
b. 7.5 percent deflation between the first and second years, and 4.3 percent deflation between the second and third years.
c. 5.3 percent inflation between the first and second years, and 4.1 percent inflation between the second and third years.
d. 7.5 percent inflation between the first and second years, and 4.3 percent inflation between the second and third years.

Answer 1

The correct answer is:

5.0 percent deflation between the first and second years, and 3.0 percent deflation between the second and third years. (a)

Step-by-step explanation:

to calculate the percentage deflation, we will simply calculate the percentage change in price between the years stated. This is calculated as follows:

% change =
`\%\ change = (P_2 - P_1)/(P_1) * 100\\where:\\P_1 = initial\ price\ index\\P_2 = New\ price\ index\\for\ first\ and\ second\ years\\\therefore \%\ change = (142.5 - 150)/(150) = (-7.5)/(150)= -0.05 * 100 = -5\%\\`

Note that the negative sign shows a deflation.

if you use the same method for years two and three, you should get -3%, using P₁ as 142.5 and p₂ as 138.2. Hence option 'a' is correct.