Question

The value of money is affected by the inflation rate-the higher the inflation rate, the less valuable money will become over time. The rate of inflation is calculated using the formula below, in which CPI represents the consumer price index, a measure of the average of a typical basket of consumer goods and services (where goods and services are weighted relative to how often they are purchased by a normal consumer): \(\frac{\text { This Year's CPI - Last Year's CPI }}{\text { Last Year's CPI }} \times 100\) The current rate of inflation would definitely be zero if the CPI a year ago equaled which of the following? (A) The CPI a year from now (B) This year's CPI (C) Zero (D) 100

Short answer

(B) This year's CPI

Step-by-step solution

Understand the Problem

We want to find out when the rate of inflation equals zero. The formula for the inflation rate is given by \(\frac{\text{This Year's CPI - Last Year's CPI}}{\text{Last Year's CPI}} \times 100\). To make the rate of inflation zero, the numerator of the fraction should be zero, meaning that "This Year's CPI - Last Year's CPI" should equal zero.

Set the Equation for Zero Inflation

For the inflation rate to be zero, the equation becomes \(\text{This Year's CPI} - \text{Last Year's CPI} = 0\). This implies that \(\text{This Year's CPI} = \text{Last Year's CPI}\).

Analyze the Options

Given the options: (A) The CPI a year from now, (B) This year's CPI, (C) Zero, and (D) 100, we need to choose the option that makes Last Year's CPI equal to This Year's CPI. The correct choice would make these values equal so the numerator becomes zero.

Identify the Correct Answer

Option (B) 'This year's CPI' fits the solution as it sets \(\text{Last Year's CPI}\) equal to \(\text{This Year's CPI}\), hence making the numerator zero and fulfilling the condition for the inflation rate to be zero.

Key concepts

Inflation Rate

Inflation rate is a way to measure how much the price levels of goods and services rise over time. When prices go up, the same amount of money buys fewer goods and services, which means the value or purchasing power of money decreases.

To calculate the inflation rate, you use the formula:

• Subtract last year's Consumer Price Index (CPI) from this year's CPI.
• Divide the result by last year's CPI.
• Multiply by 100 to get a percentage.

If the inflation rate is high, costs are rising fast. If it is low or zero, costs are stable or not rising at all. An inflation rate of zero means prices haven't changed since last year, making the value of money stable.

Consumer Price Index

The Consumer Price Index, or CPI, is an important economic measure used to track changes in the price level of a typical "basket" of goods and services over time. This basket includes items a typical consumer might buy, like food, clothing, and entertainment.

Here’s what to know about CPI:

• CPI compares the cost of this basket in different years to see if prices are higher or lower.
• CPI is used as part of the inflation rate formula to determine how prices are changing overall.
• An increase in CPI indicates rising prices or inflation.

Understanding CPI helps governments and businesses make informed decisions about the economy and helps consumers understand how their purchasing power is affected.

Numerical Reasoning

Numerical reasoning is a vital skill, especially when dealing with calculations like the inflation rate. It involves using mathematical concepts to understand and solve problems related to numbers and data.

Here are steps to improve your numerical reasoning:

• Familiarize yourself with basic mathematical operations like addition, subtraction, multiplication, and division.
• Practice interpreting data from graphs and charts as these often contain numerical information.
• Work on exercises that require you to calculate percentages, as this is often required in economic indicators like the inflation rate.

Improving your numerical reasoning skills will help you understand economic concepts better and make informed decisions.