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). BASE YEAR (2010) 2017 Price $11.00 2.45 15.00 2018 Price $16.20 2.40 14.00 Quantity Price $10.00 2.00 15.00 Product Haircuts Movies CPI 9 The inflation rate for 2018 as measured by the consumer price index s % Enter your response rounded to two decimal places.

Answer 1

Calculate the CPI in 2017 as follows: Cost of basket of goods at current year prices -x100 CPI 2017 Cost of basket of goods at base year prices (3x11)+(9x2.45)+(2x15). x100 (3×10)+(9×2)+(2x15) 33+22.05 + 30 x100 30+18+30 85.05 -x100 78 109.04 Thus, the CPI in 2017 is 109.04 Calculate the CPI in 2018 as follows: Cost of basket of goods at current year prices x100 CPI 2018 Cost of basket of goods at base year prices (3x16.20)+ (9х2.40) + (2x14) x100 (3x10)+(9x2)+(2x15) 48.6 +21.6+28 x100 30+18+30 98.2 Ex100 78 125.90 Thus, the CPI in 2018 is 125.90

Calculate the inflation rate in 2018 as follows: CPI in the current year - CPI in previous year CPI in previous year Inflation rate = x100 125.90 – 109.04 -x100 109.04 16.86 -x100 109.04 15.46% Thus, the inflation rate is 15.46%