Question

The monthly market basket for consumers consists of pizza, t-shirts, and rent. The table below shows market basket quantities and prices for the base year (Year 1) and in the following two years. Base Year (Year 1) Quantity Product Pizza T-Shirts Rent Price in the Base Year .$3.50 $25.00 $350.00 Price in Year 2 $4.38 $22.50 $385.00 Price in Year 3 $4.73 $26.25 $455.00 The inflation rate between Year 1 and Year 2 is The inflation rate between Year 2 and Year 3 is %. (Round both answers to one decimal place.) %.

Answer 1

	Year 1 (Base year)	Year 2	Year 3	Market basket in Year 1 (Price in year 1 x Quantity in Year 1)	Market basket in Year 2 ( Price in year 2 x Quantity in year 1)	Market basket in Year 3 ( Price in year 3 x Quantity in year 1)
Item	Price $	Quantity	Price $	Quantity	Price $	Quantity	$	$
Pizza	3.50	20	4.38	20	4.73	20	70.00	87.60	94.60
T shirt	25.00	3	22.50	3	26.25	3	75.00	67.50	78.75
Rent	350.00	1	385	1	455	1	350.00	385.00	455.00
							495.00	540.10	628.35
CPI in year 1 (base year) is 100
CPI=( Cost of the base year market basket in the current period (year 2)/Cost of the base year market basket in the base period (year 1) x100
CPI for year 2=	(540.10/495) 100	109.11
CPI for year 3 =	(628.35/495) 100	126.94
Inflation between year 1 and year2
(Current period CPI-Prior period CPI)/Prior period CPI
(109.11-100)/100=	9.10%
Inflation between year 2 and year 3
(126.94-109.11)/109.11=17.8%