Question

econ 202

Question 2 (4pts): Suppose that we have a CPI basket that includes: pictures of video games, mountain dew (a soda), and pizza. CPI Basket 1980 Video games Mountain Dew Pizza Quantity 1 10 5 Prices 40.00 1.00 10.00 CPI Basket 2019 Quantity Video games 5 Mountain Dew 10 Pizza 8 Prices 60.00 2.50 25.00 Izza The value of the CPI basket in 1980 is The value of the CPI basket in 2019 is The CPI in 2019 using 1980 as a base year is Inflation between 1980 and 2019 is:

Answer 1

Calculate the value of CPI basket in 1980 -

Value = [Quantity of video games * Price of video games] + [Quantity of Mountain Dew * Price of Mountain Dew] + [Quantity of pizza * Price of pizza]

Value = [1 * 40] + [10 * 1] + [5 * 10]

Value = 40 + 10 + 50

Value = 100

The value of CPI basket in 1980 is 100.

Calculate the value of CPI basket in 2019 -

Value = [Quantity of video games * Price of video games] + [Quantity of Mountain Dew * Price of Mountain Dew] + [Quantity of pizza * Price of pizza]

Value = [5 * 60] + [10 * 2.50] + [8 * 25]

Value = 300 + 25 + 200

Value = 525

The value of CPI basket in 2019 is 525.

Calculate CPI in 2019 using 1980 as base year -

CPI = [Value of CPI basket in 2019/Va;ue of CPI basket in 1980] * 100

CPI = [525/100] * 100 = 525

The CPI in 2019 using 1980 as base year is 525.

1980 is taken as the base year.

CPI in base year is always 100.

So, CPI in 1980 is 100

Calculate inflation rate between 1980 and 2019 -

Inflation rate = [(CPI in 2019 - CPI in 1980)/CPI in 1980] * 100

Inflation rate = [(525 - 100)/100] * 100 = [425/100] * 100 = 425%

The inflation rate between 1980 and 2019 is 425%.