Question

Government survey takers determine that typical family expenditures each month in the year designated as the base year are as follows . 25 pizzas, $10 each . Apartment rent, $600 per month 2.5 . Phone service (basic service plus 10 long-distance calils). $50 per month References In the year following the base year, the survey takers ne that pizzas have risen to $11 each, apartment rent Is $620, gasoline Instructions: Enter your responses by rounding the CPl to three decimal places and the rate of a Find the CP1 in the subsequent year and the rate of inflation beween the base year end the subsequent year Rate of infiation % b The family's nominal income rose by 5 percent between the base year and the subsequent year Are they worse off or better off in terms of what their Income is able to buy? Click to better off still in the same position worse off 1 of 8EE Next> Type here to search

Answer 1

CPI is the change in the prices of goods and services from the base period. Let say here:

The current year expenditure of family is (11*25)+620+120+30= 275+620+120+30= $1045 while the expenditure in the base year is (10*25)+600+100+50= $1000

Dividing new expenditure by old expenditure to find the proportionate change in the expenditure= 1045/1000= 1.045

The CPI of the base year is 100 and the CPI for the current or subsequent year will be 100*1.045= 104.5

Inflation= Percentage change in CPI over the base and subsequent years. Thus it is: (104.5-100)/100*100= 4.5%

Now, since the prices over the year have increased by 4.5% while the income has increased by 5% (.5% greater than inflation), thus the family is well off or better off now.