Question

3. (12 points) Suppose there are only two goods in the economy, namely goods A and goods B. Using 2014 as base year and fix the basket as the quantity in 2014, calculate the CPI in 2015 and the inflation rate by CPI in 2015. Table 2: Prices and Quantities 2014 2015 A B Price Quantity Price $31 1000 $ 36 $ 102 200 $ 100 Quantity 1050 205

Answer 1

Cost of market basket in 2014 = ($31 * 1000) + ($102 * 200)

= $51,400

Cost of market basket in 2015 = ($36 * 1000) + ($100 * 200)

= $56,000

CPI = (Cost of market basket in current year / Cost of market basket in base year) * 100

CPI in 2014 = ($51,400 / $51,400) * 100 = 100

CPI in 2015 = (56,000 / 51,400) * 100 = 108.95

Inflation rate in 2015 = [(108.95 - 100) / 100)] * 100 = 8.95%