Question

As shown in Exhibit \(6,\) the rate of inflation for Year 5 is a. 4.2 percent. b. 5 percent. c. 20 percent. d. 25 percent.

Short answer

The inflation rate for Year 5 can be found using the formula \( \textrm{Inflation Rate} = \frac{\textrm{Price Level in current year} - \textrm{ Price Level in previous year}}{\textrm{Price Level in previous year}} \times 100\). Based on the data in Exhibit 6, plug in the price levels for Year 4 and Year 5, and calculate the inflation rate. Compare the result with the given options: a. 4.2 percent, b. 5 percent, c. 20 percent, and d. 25 percent. The calculated inflation rate will indicate the correct answer.

Step-by-step solution

Understand the data in Exhibit 6

We need to analyze the information provided in Exhibit 6 to find the necessary data to calculate the inflation rate for Year 5. We are looking for price level, consumer price index or any related data that allows us to find the percentage change in price level from Year 4 to Year 5.

Percent change formula

To find the inflation rate, we need to use the percent change formula. The formula for calculating the percentage change in price level is: \( \textrm{Inflation Rate} = \frac{\textrm{Price Level in current year} - \textrm{ Price Level in previous year}}{\textrm{Price Level in previous year}} \times 100\) In this situation, we will use this formula to find the inflation rate from Year 4 to Year 5.

Find the price levels for Year 4 and Year 5 in Exhibit 6

From Exhibit 6, let's assume the following information is provided: - Price level in Year 4: \(X\) - Price level in Year 5: \(Y\)

Calculate the inflation rate for Year 5 using the given data

Now, we will apply the percent change formula to calculate the inflation rate for Year 5: \( \textrm{Inflation Rate} = \frac{Y - X}{X} \times 100\) Plugging in the values of X and Y from Exhibit 6, we can calculate the inflation rate.

Compare the calculated inflation rate with the given options

After calculating the inflation rate, we need to compare it with the possible answers: a. 4.2 percent b. 5 percent c. 20 percent d. 25 percent The calculated inflation rate will allow us to determine which option is correct.

Key concepts

Percent Change Formula

When calculating inflation, one of the key tools you use is the percent change formula. This formula helps determine how a value has changed from one period to another as a percentage. This is valuable in understanding economic trends like inflation.The formula is straightforward:

• Take the value in the current year.
• Subtract the value from the previous year.
• Divide the result by the previous year's value.
• Multiply by 100 to convert it to a percentage.

This can be expressed mathematically as:\[\textrm{Percent Change} = \frac{\textrm{Value in current year} - \textrm{Value in previous year}}{\textrm{Value in previous year}} \times 100\]In the exercise, the percent change formula is used to find the change in price levels from Year 4 to Year 5, giving us the inflation rate for that period.

Consumer Price Index

The Consumer Price Index, or CPI, is a vital tool in measuring inflation. It indicates the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. The CPI provides an overall measure of price changes within an economy, helping to gauge the inflation rate. This index is crucial because:

• It reflects spending patterns for each of two population groups: all urban consumers and urban wage earners and clerical workers.
• It's a valuable economic indicator to make cost of living adjustments.
• It provides a reliable measure of inflation, which is essential for many economic policies and decisions.

In the exercise, the CPI can be the data source you refer to when examining price levels in Year 4 and comparing them to Year 5 to assess inflation.

Price Levels

Price levels represent the average of all prices within an economy. They provide an overview of the current purchasing power of money in a specific time period. Understanding price levels is essential for calculating inflation as it gives context to changes in monetary value and consumer purchasing power. Important points about price levels include:

• They help economists compare the purchasing power of money over time.
• High price levels indicate potential inflation, affecting consumers' purchasing decisions.
• Significant changes in price levels are often associated with economic fluctuations or policies that impact supply and demand.

In the context of the exercise, comparing price levels from Year 4 to Year 5 using the CPI or other data gives you the necessary information to calculate the inflation rate.

Yearly Inflation Rate

The yearly inflation rate measures how much prices have increased over a year. It indicates the rate at which the general level of prices for goods and services is rising, which subsequently relates to purchasing power. Here's why understanding yearly inflation rates is vital:

• It impacts consumers' and businesses' economic decisions, such as spending and saving.
• Central banks closely monitor it to set monetary policy, including interest rates.
• A clear understanding aids in future planning, ensuring budgets reflect true economic conditions.

To calculate it for Year 5, as in the exercise, you utilize the percent change in price levels between Year 4 and Year 5. Here, the goal is to match your result with the provided options to verify your calculation.