a)
The question requires us to define the
a)
Explanation of Solution
CPI measures the change in prices of a basket of goods and services in a given time. It is used to calculate the official inflation rate in an economy. The following expression shows the relationship between CPI and the inflation rate.
Generally, government payments and private payments such as tax brackets, cost-of-living allowances, and wage settlements are indexed to the CPI.
b)
The question requires us to determine the value of the inflation rate.
b)
Answer to Problem 2FRQ
The inflation rate between year 1 and year 2 is 1.48 percent.
Explanation of Solution
From part 1,
Price index in year 1 = 229.6
Price index in year 2 = 233
Insert these values in the inflation formula:
The inflation rate between year 1 and year 2 is 1.48 percent.
The inflation rate formula in terms of price index is:
Chapter 15 Solutions
Krugman's Economics For The Ap® Course
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