Answer to Question #309011 in Macroeconomics for Kinza Tariq

Question

4. Explain how inflation rate is calculated. Summarize the behavior of inflation rates during

the period from the 1980s onward.

Answer 1

Calculation of inflation 

First, calculate the CPI for the given years.  

CPI = (value of current market basket/value of basket in the base year) x 100

The CPI for the base year is 100

Name the CPI for the year after base year as A and the second year as B. for example, if we have three years, 2009, 2010 and 2011, and 2009 is the base year, 2010 CPI will be A and 2011 CPI B. 

Then calculate the inflation rate

Inflation rate = ((B-A) /A) x100

In 1980, the rate of inflation and unemployment was very high. The interest rates during the year rose, fell briefly and spiked again. This led to unemployment and a brief recession between January and July 1980. Between July 1981 and November 1982, the economy was again in a more severe recession. The unemployment rate went to 11 percent will inflation rate went down to 5 percent by the end of the recession period. In 1980s the purchasing power went down by 13.50% in comparison to 1979.

In the 1990s, the inflation rate remained below 1%, and unemployment rates fell below 5%. During the time, steady jobs were created, low inflation rates, strong economic growth, and increased productivity. In the 2000s, the inflation rates have remained down. Between 2001 and 2009, there was a threat of deflation since the prices went down. Generally, in the 2000s, the prices have been stable. Down the line, the inflation rate in the 1980s remains higher compared to 2022 because it was at 13.50%. The average inflation rate per year is 2.99% between 1980 and 2022.