Which scenario reflects an annual inflation rate of 3%?

• A. The average price of goods decreases from \$100 to \$97 over one year.
• B. The average price of goods remains at \$100 for two consecutive years.
• C. The average price of goods increases from \$100 to \$110 over one year.
• D. The average price of goods increases from \$100 to \$103 over one year.

Answer: (D)

Verified step by step guidance

1. Understand that the inflation rate measures the percentage change in the average price level of goods and services over a period, typically one year.
2. Recall the formula for the inflation rate: \(\text{Inflation Rate} = \left( \frac{P_{t} - P_{t-1}}{P_{t-1}} \right) \times 100\%\), where \(P_{t-1}\) is the price level in the previous year and \(P_{t}\) is the price level in the current year.
3. Apply the formula to each scenario by substituting the given prices to calculate the percentage change in price level.
4. Identify the scenario where the price level increases by exactly 3%, which means \(P_{t} = P_{t-1} \times 1.03\).
5. Conclude that the scenario with the average price increasing from \$100 to \$103 over one year reflects an annual inflation rate of 3%.