Question

1. If the price index for Year 1 is 102.5 and the price index for Year 2 is 104.6, calculate the rate of inflation in percent to 2 decimal points.

2. If the cost of the market basket in Year 1 (the "base year") is $3,000 and the cost of the market basket in Year 2 is $3,250, what is the Price Index for Year 2?

a. 92.31

b. 100.0

c. 108.3

3. Which of the following rates of inflation would be considered "hyperinflation"?

a. 5%

b. 30%

c. 2000%

Answer 1

Ans.

Inflation rate = (CPI for Year 2 / CPI for year 1) - 1 = (104.6/102.5) - 1 = 0.020487 or 2.0487%

Ans Option c

Price index for year 2 = Price of basket in year 2 / Price of basket in base year = 3250/ 3000 = 1.08333 or 108.333

Ans. Option c

Hyperinfltion is a situation when the prices are rising by more than 50% a month over a period of time. So, 2000% is the only option that satisfies the definition of hyperinflation.

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