Question

The market basket used to calculate the CPI in Aquilonia is 4 loaves of bread, 6 gallons of milk, 2 shirts, and 2 pairs of pants. In 2005, bread cost $1.00 per loaf, milk cost $1.50 per gallon, shirts cost $6.00 each, and pants cost $10.00 per pair. In 2006, bread cost $1.50 per loaf, milk cost $2.00 per gallon, shirts cost $7.00 each, and pants cost $12.00 per pair. Using 2005 as the base year, what was Aquilonia’s inflation rate in 2006?

Answer 1

Answer: Inflation = 22.44%

Explanation:

Given :

In 2005

Cost of bread = $1.00 per loaf

Cost of milk = $1.50 per gallon,

Cost of shirt = $6.00 each,

Cost of pant = $10.00 per pair.

whereas,

In 2006

Cost of bread = $1.50 per loaf,

Cost of milk = $2.00 per gallon,

Cost of shirt = $7.00 each,

Cost of pant = $12.00 per pair.

∴ $CPI_{2005}$ = [(Cost of bread × Quantity ) + (Cost of milk × Quantity) + (Cost of shirt × Quantity ) + (Cost of bread × Quantity)]

$CPI_{2005}$ = $45

Similarly,

 $CPI_{2006}$ = [(Cost of bread × Quantity ) + (Cost of milk × Quantity) + (Cost of shirt × Quantity ) + (Cost of bread × Quantity)]

$CPI_{2006}$ = $56

∴ Inflation = $[\frac{CPI_{2006} - CPI_{2005}}{CPI_{2005} }]100$

⇒ Inflation = 22.44%