Question

Government survey takers determine that typical family expenditures each month in the year designated as the base year are as follows: • 20 pizzas, $10 each • Apartment rent, $600 per month • Gasoline and car maintenance, $100 per month • Phone service (basic service plus 10 long-distance calls), $50 per month In the year following the base year, the survey takers determine that pizzas have risen to $11 each, apartment rent is $640, gasoline and maintenance costs are $112, and phone service has dropped in price to $40. Instructions: Enter your responses by rounding the CPI to three decimal places and the rate of inflation to one decimal place. a. Find the CPI in the subsequent year and the rate of inflation between the base year and the subsequent year. CPI: Rate of inflation:

Answer 1

CPI = [(Cost of market basket at subsequent year prices) / (cost of market basket at base year prices)] * 100

Cost of market basket at subsequent year price = (20 * $11) + $640 +$112 + $40

Cost of market basket at subsequent year price = $220 + $640 + $112 + $40

Cost of market basket at subsequent year price =$1012

Cost of market basket at base year price = (20 * $10) + $600 + $100 + $50

Cost of market basket at base year price = $200 + $600 + $100 + $50

Cost of market basket at base year price = $950

CPI = ($1012 / $950) * 100

CPI = 106.526

CPI of base year is always 100

Inflation = [(CPI of subsequent year - CPI of base year) / (CPI of base year) ] *100

Inflation = [(106.526 - 100)/100]*100

Inflation = 6.5%