Answer to Question #301431 in Macroeconomics for ananya

Question

1. A typical family on Sandy Island consumes only juice and cloth. Last year, which was the base year, the family spent $40 on juice and $25 on cloth. In the base year, juice $4 a bottle and cloth is $5 a length. This year, juice is $4 a bottle and cloth is $6 a length. Calculate:
2. The CPI basket
3. The CPI in the current year
4. The inflation rate in the current year

Answer 1

(a)CPI basket;

no of juices purchased=$\frac {money spent on juice}{price of juice bottle}$ =$\frac{40}{4}=10$

no of clothe purchased$=\frac{ no of cloth purchased}{price of clothe}=\frac {25}{5}=5$

so CPI basket is 10 bottle of juice and 5 units of cloth

(b). CPI of current year$={price of juice} \times{no of juice bottle}+{price of cloth} \times{no of cloth unit}=$ 4$\times$ 10+6$\times$5=40+30=70

(C).cpi in base year=money spent on juice + money spent on cloth=$40+$25=$65

.inflation rate = $(\frac{cpi in current year -cpi in base year}{cpi in base year})\times 100$ =$(\frac {70-65}{65})\times100$ =7.69

thus inflation rate =7.69%