Answer to Question #185259 in Macroeconomics for mustafa

Question

Compute the price index for each year. Use the first year as the base year. What was the inflation rate between the two years. Item Quantity Unit Price-Last Year Unit Price-This Year Coffee 20 pounds $3.00 $4.00 Tuition 1 year 4,000.00 7,000.00 Pizza 100 pizzas 8.00 10.00 VCR rental 75 days 15.00 10.00 Vacation 2 weeks 300.00 500.00

Answer 1

Price index = Cost of basket in current year/Cost of basket in base year × 100

Price index (Last Year)

= [20 × 3 + 1 × 4000 + 100 § 8 + 75 × 15 + 2 × 300]/[20 × 3 + 1 x 4000 + 100 § 8 + 75 § 15 + 2 × 300] × 100

= [60 + 4000 + 800 + 1125 + 600]/6585 × 100

= 6585/6585 × 100 = 100

Price index (This year)

= [20 × 4 + 1 × 7000 + 100 × 10 + 75 × 10 + 2 × 500]/[20 × 3 + 1 × 4000 + 100 × 8 + 75 × 15 + 2 × 300] ×100

= 9830/6585 × 100 = 149.28

Inflation = (Price index in this year $-$ Price index in base year)/Price index in base year ×100

= (149.28 $-$ 100)/100 ×100 = 49.28%