Question

A typical family on Sandy Island consumes only juice and cloth.

Last​ year, which was the base​ year, the family spent $20 on juice and $30 on cloth. In the base​ year, juice was ​$5 a bottle and cloth was $5 a length.

This​ year, juice is ​$2 a bottle and cloth is $7 a length.

Calculate

a. The CPI basket.

b. The CPI in the current year.

c. The inflation rate in the current year.

Answer:

A: The CPI basket is ____ bottles of juice and ____ lengths of cloth.

B: The CPI in the current year is ____ (Round to the 1 decimal place)

C: The inflation rate in the current year is ____ percent (Round to 1 decimal place)

Answer 1

Last year :

Money spent on juice = $20

Price of a juice bottle = $5

Quantity = 20/5 =4 bottles

Money spent on cloth =$30

Price of a cloth = $5

Quantity = 30/5 =6 units of length

A) The CPI basket is 4 bottles of juice and 6 lengths of cloth.

Current year:

Price of juice = $2

Price of cloth = $7

CPI in the base year = 100

CPI in the current year = Nominal GDP/Real GDP*!00

Nominal GDP = 2*4+7*6 = 50

Real GDP = 5*4+5*6 = 50

B)CPI in current year = 50/50*100 = 100

C)The inflation rate in the current year is {(Current CPI – Base CPI) / Base CPI} × 100

100-100/100*100 =0%