If the price index is now 120, it means:
A)prices are 120 percent higher than in the base year.
B)prices are 20 percent higher than in the base year.
C)prices are 1.2 percent higher than in the base year.
D)nominal GDP will be less than real GDP.

Question

If the price index is now 120, it means:
A)​prices are 120 percent higher than in the base year.
B)​prices are 20 percent higher than in the base year.
C)​prices are 1.2 percent higher than in the base year.
D)​nominal GDP will be less than real GDP.

Quizplus · Accepted Answer

A price index of 120 means that prices have increased by 20 percent (or 0.20) compared to the base year. This can be calculated by subtracting 100 from the index (120-100=20) and then dividing by the base year value (20/100=0.20 or 20%). Therefore, choice B is the correct answer. Choice A is incorrect because it suggests that prices are 120 percent higher, which would imply a price index of 220. Choice C is incorrect because it suggests that prices are only 1.2 percent higher, which would imply a price index of 101.2. Choice D is also incorrect because the price index does not provide information about nominal or real GDP.

If the Price Index Is Now 120, It Means