Question

The price index in the first year is 110, in the second year is 100, and in the third year is 96. The economy experienced

a. 9.1 percent deflation between the first and second years, and 4 percent deflation between the second and third years.

b. 9.1 percent deflation between the first and second years, and 9.6 percent deflation between the second and third years.

c. 10 percent deflation between the first and second years, and 4 percent deflation between the second and third years.

d. 10 percent deflation between the first and second years, and 8.7 percent deflation between the second and third years.

Answer 1

Answer:

a. 9.1 percent deflation between the first and second years, and 4 percent deflation between the second and third years.

Explanation:

To calculate the rate of inflation/deflation, we have to divide by the oldest price index.

The second year, the variation of the price index was:

$\Delta PI/PI=\frac{PI_2-PI_1}{PI_1}=\frac{100-110}{110}=\frac{-10}{110}=-0.909=-9.1\%$

This means a 9.1% deflation.

The third year, the variation of the price index was:

$\Delta PI/PI=\frac{PI_3-PI_2}{PI_2}=\frac{96-100}{100}=\frac{-4}{100}=-0.04=-4\%$

This means a 4% deflation.