The index number representing the price level changes from 110 to 115 in one year, and then from 115 to 120 the next year. Since the index number increases by five each year, is five the inflation rate each year? Is the inflation rate the same each year? Explain your answer.


The total price of purchasing a basket of goods in the United Kingdom over four years is as follows:

  • Year 1=£940
  • Year 2=£970
  • Year 3=£1000
  • Year 4=£1070

Calculate two price indices, one using year 1 as the base year (set equal to 100) and the other using year 4 as the base year (set equal to 100). Then, calculate the inflation rate based on the first price index. If you had used the other price index, would you get a different inflation rate? If you are unsure, do the calculation and find out.


Within one or two percentage points, what has the U.S. inflation rate been during the last 20 years? Draw a graph to show the data.


If inflation rises unexpectedly by five percent, indicate for each of the following whether the economic actor is helped, hurt, or unaffected:

  1. A union member with a COLA wage contract
  2. Someone with a large stash of cash in a safe deposit box
  3. A bank lending money at a fixed rate of interest
  4. A person who is not due to receive a pay raise for another 11 months

Rosalie the Retiree knows that when she retires in 16 years, her company will give her a one-time payment of $20,000. However, if the inflation rate is six percent per year, how much buying power will that $20,000 have when measured in today’s dollars? Hint—Start by calculating the rise in the price level over the 16 years.