Question

If the price index was 90 in Year 1, 100 in Year 2, and 95 in Year 3, then the economy experienced a. 10 percent inflation between Years 1 and 2, and 5 percent inflation between Years 2 and 3. b. 11.1 percent inflation between Years 1 and 2, and 5 percent inflation between Years 2 and 3. c. 11.1 percent inflation between Years 1 and 2, and 5 percent inflation between Years 2 and 3. d. 10 percent inflation between Years 1 and 2, and 5 percent inflation between Years 2 and 3.

Answer 1

If the price index was 90 in Year 1, 100 in Year 2, and 95 in Year 3, then the economy experienced then, 11.1 percent inflation between Years 1 and 2, and 5 percent inflation between Years 2 and 3.

Suppose you purchased 5 kg of rice last week for Rs 100. This indicates that 1 kilograms of rice cost Rs. 20. When you went to the same shopkeeper this week and paid Rs. 100 for rice, he only gave you 4 kg of rice. Additionally, he mentioned that rice now costs Rs. 25 per kilograms due to price increases.

This illustration demonstrates how the declining purchasing power of money works. Before, you could get 5 kg of rice for Rs 100, but today you can only get 4 kg. Money's purchasing value accordingly decreased. It's called inflation.

And now let's figure out the inflation rate (percentage). If the price of rice rose from Rs.20 per kilograms to Rs.25, a rise of Rs.5 would be added to the original price.

Hence, option C is correct.

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