2. (0, 7, or 10) Suppose country X produces two goods, chocolate bars and bottle

Question

2. (0, 7, or 10) Suppose country X produces two goods, chocolate bars and bottles of water. In the base year, 2002, the typical country X consumer purchased 100 n h chocolate bars and 200 bottles of water. The prices of chocolate bars and bottles of heg water are given in the following table for selected years. Font Bottle of Water 1.00 $1.50 $1.75 Year Chocolate Bar $1.50 $1.50 $2.00 hoto 2002 on re 2003 2004 Character S e c Alignment a. Calculate the CPI for all three years. over labb. Calculate the rate of inflation between 2002 and 2003 and the rate of inflation te for between 2003 and 2004.

Explanation / Answer

2. CPI calculation:

a. Year 2002:

• CPI for 2002 = $1.50x100 + $1.00x200 = $350.

Year 2003:

• CPI for 2003 = $1.50x100 + $1.50x200 = $450.

Year 2004:

• CPI for 2004 = $2.00x100 + $1.75x200 = $550.

b. Rate of inflation between 2002 and 2003:

• Rate of inflation = (450-350)/350 x 100 = 28.5%

Rate of inflation between 2003 and 2004:

• Rate of inflation = (550-450)/450 x 100 = 22.2%.

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