Question

Product ​	Quantity 2017	Price 2017	Quanity 2018	Price 2018
Meat	100	$10	120	$12
Potatoes	200	$2	180	$3

Assume the base year is given as 2017 and the market basket for the consumer price index has two products–meat and potatoes–with the values in 2017 and 2018 for price and quantity given by the table above. The Consumer Price Index for 2018 equals

2)

If the price index in an certain economy rises in three consecutive years from 100 to 120 to 140, then such an economy is experiencing

		constant annual inflation
		disinflation
		deflation
		appreciating inflation

Answer 1

Question 1

The base year is 2017.

So, the quantity of 2017 would be taken as the market basket quantity for calculation of consumer price index.

Calculate the value of the market basket in 2017 -

Value = [Quantity of meat in 2017 * Price of meat in 2017] + [Quantity of potatoes in 2017 * Price of potatoes in 2017]

Value = [100 * $10] + [200 * $2] = $1,000 + $400 = $1,400

The value of market basket in 2017 is $1,400.

Calculate the value of the market basket in 2018 -

Value = [Quantity of meat in 2017 * Price of meat in 2018] + [Quantity of potatoes in 2017 * Price of potatoes in 2018]

Value = [100 * $12] + [200 * $3] = $1,200 + $600 = $1,800

The value of market basket in 2018 is $1,800.

Calculate the consumer price index for 2018 -

CPI = [Value of the market basket in 2018/Value of the market basket in 2017] * 100

CPI = [$1,800/$1,400] * 100 = 128.57

The consumer price index for 2018 is 128.57

Question 2

The price index in three consecutive years are 100 to 120 to 140.

Calculate the inflation rate between year 1 and year 2 -

Inflation rate = [(120 - 100)/100] * 100 = 20%

The inflation rate between year 1 and year 2 is 20%.

Calculate the inflation rate between year 2 and year 3 -

Inflation rate = [(140 - 120)/120] * 100 = 16.67%

The inflation rate between year 2 and year 3 is 16.67%

The rate of inflation is decreasing.

When rate of inflation is decreasing then it is called disinflation.

Hence, the correct answer is the option (2) [Disinflation].