A price index for a market is set at 100 in the base year and stands at 112 two years later. What does this show?
Correct Answer
B) Prices have risen 12 percent since the base year
Why this is correct: An index number shows relative change from a base period set to 100. An index of 112 means the current level is 112% of the base, indicating a 12% total increase (112 - 100 = 12). Why the other choices are wrong: 'Prices have risen 112 percent since the base year' misinterprets the index level as the percentage increase. 'Prices have risen 12 percent in each of two years' incorrectly assumes the increase is annual and compounded; the index shows the cumulative change. 'The typical sale price is now $112,000 in that area' is wrong; an index is unitless and does not express a dollar price. Exam tip: To find the total percentage change from an index, subtract 100. An index of 112 means a 12% total increase.
Why This Is the Correct Answer
Why this is correct: An index number shows relative change from a base period set to 100. An index of 112 means the current level is 112% of the base, indicating a 12% total increase (112 - 100 = 12). Why the other choices are wrong: 'Prices have risen 112 percent since the base year' misinterprets the index level as the percentage increase. 'Prices have risen 12 percent in each of two years' incorrectly assumes the increase is annual and compounded; the index shows the cumulative change. 'The typical sale price is now $112,000 in that area' is wrong; an index is unitless and does not express a dollar price. Exam tip: To find the total percentage change from an index, subtract 100. An index of 112 means a 12% total increase.
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