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Suppose that in 1990, a coffee cost $2, and the CPI at the time was 99. In 2022, a coffee cost $6, and the CPI at the time was 260.

Compute the percentage change in the real price of a coffee from 1990 to 2022.

*Hint: Convert the 1990 price of a coffee into 2022 dollars, and then calculate the percentage change in the prices, using the 2022 price as the new value and 1990 as the previous value. Round your answer to two decimal places (0.01).*

Answer :

After accounting for inflation, the true price of coffee climbed by 14.22% between 1990 and 2022.

To compute the percentage change in the real price of a coffee from 1990 to 2022, we need to adjust the 1990 price for inflation using the CPI for both years.

The inflation rate from 1990 to 2022 is given by:

Inflation rate = ((CPI in 2022 - CPI in 1990) / CPI in 1990) * 100%

= ((260 - 99) / 99) * 100%

= 162.63%

This means that prices increased by 162.63% from 1990 to 2022.

To adjust the 1990 price of $2 for inflation, we multiply it by the inflation factor:

Inflation factor = CPI in 2022 / CPI in 1990

= 260 / 99

= 2.6262

Adjusted price in 2022 dollars = 2 * 2.6262 = 5.2524

Now we can calculate the percentage change in the real price of a coffee from 1990 to 2022:

Percentage change = ((2022 price - 1990 price) / 1990 price) * 100%

= ((6 - 5.2524) / 5.2524) * 100%

= 14.22%

Therefore, the real price of a coffee increased by 14.22% from 1990 to 2022 after adjusting for inflation.

Learn more about percentages here:

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