Chapter 7, Problem 2SQ

To determine

The rate of inflation.

Answer to Problem 2SQ

Option 'd’ is correct.

Explanation of Solution

Option (d):

The rate of inflation is calculated as follows:

$\begin{array}{l}\text{Inflation Rate }=\frac{{\text{CPI}}_{\text{y}}-{\text{CPI}}_{\text{x}}}{{\text{CPI}}_{\text{x}}}\times 100\\ 8=\frac{325-300}{300}\times 100\\ 8=\frac{25}{300}\times 100\\ 8\approx 8.33\end{array}$

The calculated value of the rate of inflation is approximately equal to the given value. Thus, option 'd' is correct.

Option (a):

$\begin{array}{l}\text{Inflation Rate }=\frac{{\text{CPI}}_{\text{y}}-{\text{CPI}}_{\text{x}}}{{\text{CPI}}_{\text{x}}}\times 100\\ 325=\frac{325-300}{300}\times 100\\ 325=\frac{25}{300}\times 100\\ 325>8\end{array}$

The calculated value of the rate of inflation is less than the given value of 325 percent. Thus, option 'a' is incorrect.

Option (b):

$\begin{array}{l}\text{Inflation Rate }=\frac{{\text{CPI}}_{\text{y}}-{\text{CPI}}_{\text{x}}}{{\text{CPI}}_{\text{x}}}\times 100\\ 25=\frac{325-300}{300}\times 100\\ 25=\frac{25}{300}\times 100\\ 25>8\end{array}$

The calculated value of the rate of inflation is less than the given value of 25 percent. Thus, option ‘b’ is incorrect.

Option (c):

$\begin{array}{l}\text{Inflation Rate }=\frac{{\text{CPI}}_{\text{y}}-{\text{CPI}}_{\text{x}}}{{\text{CPI}}_{\text{x}}}\times 100\\ 5=\frac{325-300}{300}\times 100\\ 5=\frac{25}{300}\times 100\\ 5<8\end{array}$

The calculated value of the rate of inflation is greater than the given value of 5 percent. Thus, option ‘c’ is incorrect.

Economics Concept Introduction

Inflation: Inflation refers to a continuous increase in the average price level in an economy.

Consumer price index: Consumer price index refers to the changes in the price level of consumer goods and services purchased by households.