Suppose that in the base year, 2002, the typical basket of goods purchased by ho
ID: 1105975 • Letter: S
Question
Suppose that in the base year, 2002, the typical basket of goods purchased by households included 5 pairs of jeans, and 7 pairs of shorts. The price of each item in 2002 was $12 for jeans, and $4 for shorts. In 2003 the typical basket included 12 pairs of jeans, and 3 pairs of shorts. The price of each item in 2003 was $5 for jeans, and $10 for shorts.
a. Find the CPI in 2003.
b. Continuing from part a., if the CPI was equal to 1.25 in 2004, determine the rate of inflation between 2003 and 2004.
Explanation / Answer
(a)
Cost of basket in 2002 ($) = 5 x 12 + 7 x 4 = 60 + 28 = 88
Cost of basket in 2003 ($) = 5 x 5 + 7 x 10 = 25 + 70 = 95
CPI in 2003 = (Cost of basket in 2003 / Cost of basket in 2002) x 100 = ($95 / $88) x 100 = 1.08
(b)
Rate of inflation = % Increase in CPI = (1.25 / 1.08) - 1 = 1.1574 - 1 = 0.1574 = 15.74%
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