Question

Consider a simple basket of goods that assumes consumers buy only bread and milk. The basket consists of 3 loaves of

Answer 1

Answer:

CPI in year 2 = 108.78$

Rate of inflation from 1st year to 2nd = 0.9%

Explanation:

CPI = Consumer Price Index

      = (Cost of Market Basket in Given year/Cost of Market Basket at base) * 100

given price of bread and a gallon of milk

in year one (base year) = $1.50 and $2.90 respectively and that

in second year = $1.65 and $3.10 respectively

Since the basket consists of 3 loaves of bread and 1 gallon of milk

Cost of basket in 2nd year = 3 x 1.65 + 1 x 3.10 =  8.05

cost of basket in 1st year = 3 x 1.50 + 1 x 2.90 = 7.40

CPI  = (8.05/7.40) x 100

       = 108.78 $

we know ,Rate of inflation is given by

= (CPI in year 2 - cpi in year 1)/ cpi in year 1

= (108.78 -100)/100

= 0.0878

= 0.9%

Answer 2

Answer:

The CPI for year is 108.78, and the rate of inflation from year 1 to  year 2 is 8.78%.

Step-by-step explanation:

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