Which of the following deflation rates is correct from the CPI example given?

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Prepare for the Qualified Financial Adviser Exam 2 with flashcards and multiple choice questions, complete with hints and explanations. Get exam-ready and increase your confidence with our comprehensive study materials!

Multiple Choice

Which of the following deflation rates is correct from the CPI example given?

Explanation:
The deflation rate is the percentage change in the price index from an earlier period to a later period. It’s calculated as the decrease in the CPI divided by the CPI in the earlier period, times 100. If the CPI moved from 100 to 96.5, the deflation rate would be (100 − 96.5) / 100 × 100% = 3.5%. In the CPI example provided, the numbers align to a 3.5% drop, so that is the deflation rate shown. Other options would correspond to different CPI movements (e.g., a larger or smaller drop) that aren’t what the example produced.

The deflation rate is the percentage change in the price index from an earlier period to a later period. It’s calculated as the decrease in the CPI divided by the CPI in the earlier period, times 100.

If the CPI moved from 100 to 96.5, the deflation rate would be (100 − 96.5) / 100 × 100% = 3.5%. In the CPI example provided, the numbers align to a 3.5% drop, so that is the deflation rate shown. Other options would correspond to different CPI movements (e.g., a larger or smaller drop) that aren’t what the example produced.

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