The table below pertains to Wrexington, an economy in which the typical consumer

Question

The table below pertains to Wrexington, an economy in which the typical consumer’s basket consists of 20 pounds of meat and 10 toys.

Year

Price of

Meat

Price of a

Toy

2004

$3 per pound

$2

2005

$1 per pound

$7

2006

$4 per pound

$5

Refer to Table 2. The inflation rate was

negative in 2005 and negative in 2006.

negative in 2005 and positive in 2006.

positive in 2005 and negative in 2006.

positive in 2005 and positive in 2006.

Year

Price of

Meat

Price of a

Toy

2004

$3 per pound

$2

2005

$1 per pound

$7

2006

$4 per pound

$5

Explanation / Answer

Ans: positive in 2005 and positive in 2006.

Explanation:

Value of goods in 2004 = ($3 * 20) + ($2 * 10) = $80     [Base year]

Value of goods in 2005 = ($1 * 20) + ($7 * 10) = $90

Value of goods in 2006 = ($4 * 20) + ($5 * 10) = $130

CPI in 2004 = (80 / 80) * 100 = 100

CPI in 2005 = (90 / 80) * 100 = 112.5

CPI in 2006 = (130 / 80) * 100 = 162.5

Inflation rate in 2005 = [(112.5 - 100) / 100 ] * 100 = 12.5%

Inflation rate in 2005 = [(162.5 - 112.5) / 112.5 ] * 100 = 44.44%

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