3. (12 points) Suppose there are only two goods in the economy, namely goods A and...

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3. (12 points) Suppose there are only two goods in the economy, namely goods A and goods B. Using 2014 as base year and fix t

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Answer 1

Answer #1

Cost of market basket in 2014 = ($31 * 1000) + ($102 * 200)

= $51,400

Cost of market basket in 2015 = ($36 * 1000) + ($100 * 200)

= $56,000

CPI = (Cost of market basket in current year / Cost of market basket in base year) * 100

CPI in 2014 = ($51,400 / $51,400) * 100 = 100

CPI in 2015 = (56,000 / 51,400) * 100 = 108.95

Inflation rate in 2015 = [(108.95 - 100) / 100)] * 100 = 8.95%

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Answer 2

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