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In: Economics

Problem 3 (10 marks) Below, you are provided with two years of data on the quantities...

Problem 3

Below, you are provided with two years of data on the quantities of two goods that the average, urban family offour consumes and the market price of each. You will use these data to calculate the Consumer Price Index (CPI) and inflation rate.

Cheese and Chocolate are two goods that are consumed in Holland. Many other final goods and services areconsumed in Holland, but for simplicity, we will assume that Cheese and Chocolate are the only two final goodsconsumed in the country. The table below provides the quantity of Cheese and Chocolate that are consumed bythe average, urban family of four in Holland in two different years. The table also provides the price of a Cheeseand the price of chocolate in each year.

Year

Quantity of Chocolate

Price of chocolate

Quantity of Cheese

Price of

cheese

2016

150

€10.50

€15.00

2017

165

€13.00

€17.00

Suppose that 2016 is the base year.

Calculate the CPI in 2016 and 2017. Round your answer to the nearest one-hundredth.
Calculate the 2017 inflation rate. Round your answer to the nearest one-tenth of one percent.

Solutions

Expert Solution

Year

Quantity of Chocolate

Price of chocolate

Quantity of Cheese

Price of

cheese

2016

150

€10.50

€15.00

2017

165

€13.00

€17.00

Given,

2016 is the base year

The price of the basket of goods in 2016 = Quantity of Chocolates in 2016 x Price of chocolates in 2016 + Quantity of Cheese in 2016 x Price of Cheese in 2016 = 150 x €10.50 + 45 x €15.00 = €1575 + €675 = €2250

As 2016 is the base year, the CPI in the base year = 100 = CPI in 2016

The price of the basket of goods in 2017 = Quantity of Chocolates in 2016 x Price of chocolates in 2017 + Quantity of Cheese in 2016 x Price of Cheese in 2017 = 150 x €13.00 + 45 x €17.00 = €1950 + €765 = €2715

CPI in 2017 = Price of the basket of goods in 2017/Price of the basket of goods in the base year(2016) x 100 = €2715/2250 x 100 = 120.67

Inflation rate in 2017 = (CPI in 2017 - CPI in 2016)/CPI in 2016 x 100 = (120.67-100)/100 x 100 = 20.67% = 20.7% (rounded to the nearest one-tenth of one percent)

Rahul Sunny answered 1 year ago

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