Question

Consider the simple economy that produces only three products. Use the information in the following table to calculate the (annual rate of) inflation for 2018 as measured by the consumer price index (CPI). 2017 2018 BASE YEAR (2010) Quantity Price $10.00 2.00 15.00 Product Haircuts Hamburgers Movies 2 Price $11.00 2.45 15.00 Price $16.20 2.40 14.00 The inflation rate for 2018 as measured by the consumer price index (CPI) is %. (Enter your response rounded to two decimal places.)

Answer 1

To construct CPI, we have to find the cost of basket in each year.

The cost of basket in each year is obtained by the multiplying the quantity of goods and services in the current year with the prices in the current year.

CPI is calculate by dividing the current year cost of basket with the base year cost of basket and multiplying with hundred.

To find the inflation rate, minus the previous year CPI from the current year CPI and divide it with previous year CPI and multiply with hundred.

Cost of basket.

Year	Item	Quantity	Price	Cost of basket of goods.
2010 (base year)	Haircuts	2	$10.00	$20.00
	Hamburgers	9	$2.00	$18.00
	Movies	3	$15.00	$45.00
Total				$83.00

Cost of basket.

Year	Item	Quantity	Price	Cost of basket of goods.
2017	Haircuts	2	$11.00	$22.00
	Hamburgers	9	$2.45	$22.05
	Movies	3	$15.00	$45.00
Total				89.05

Cost of basket.

Year	Item	Quantity	Price	Cost of basket of goods.
2018	Haircuts	2	$16.20	$32.40
	Hamburgers	9	$2.40	$21.60
	Movies	3	$14.00	$42.00
Total				$96.00

CPI (2017)= 89.05/83×100= 107.29.

CPI (2018)= 96.00/83×100= 115.67

Inflation rate(2018) 115.67−107.29/107.29×100. 7.81

Answer: The inflation rate for 2018 as measured by the consumer price index (CPI) is 7.81%.