I need answer for question 9 A and B. Consider the following price information:

Question

I need answer for question 9 A and B.

Consider the following price information: Based on the information given, what was the inflation rate between year 1 and year 2? What happened to the price of coffee relative to that of milk between year 1 and year 2? Use a supply and demand diagram to illustrate the following conditions: Cost-push inflation caused by a labor union successfully negotiating for a higher wage Demand-pull inflation caused by an increase in demand for domestic products from foreign buyers.

Explanation / Answer

9A. Inflation is calculated based on the cost of a basket of goods. Since no such information is given, assume that the basked consists of 1 cup of coffee and 1 glass of milk.

Cost of the basket in year 1 = $0.50 + $1 = $1.50

Cost of the basket in year 2 = $1 + $2 = $3

Inflation = (cost in year 2 - cost in year 1)/(cost in year 1) * 100% = (3 - 1.50)/1.50 * 100 = 100%

b. Relative price of coffee to milk in year 1 = 0.50/1 *100 = 50%

Relative price of coffee to milk in year 2 = 1/2 * 100 = 50%

Thus, the relative price remained unchanged between year 1 and 2.

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