ECO - 252 Macroeconomics 5. The market basket used to calculate the CPI in Aquil

Question

ECO - 252 Macroeconomics

5. The market basket used to calculate the CPI in Aquilonia is 4 loaves of bread, 6 gallons of milk, 2 shirts, and 2 pants. In 2005, bread cost $1.00 per loaf, milk cost $1.50 per gallon, shirts cost $6.00 each, and pants cost $10.00 per pair. In 2006, bread cost $1.50 per loaf, milk cost $2.00 per gallon, shirts cost $7.00 each, and pants cost $12.00 per pair. Use the year 2005 as the base year. Round your answers to 2 decimals.

a. Calculate the cost of the market basket for both years.

b. Calculate the CPIs for both years.

c. Calculate the inflation rate for 2006 with respect to 2005.

Explanation / Answer

A) cost of market basket at 2005 prices=Price in 2005*no of quantities purcahsed of that commodity

Cost of basket in 2005 pirces=4*1+6*1.5+2*6+2*10=4+9+12+20=45

Cost of same basket in 2006 prices=4*1.5+6*2+2*7+2*12=6+12+14+24=56

B)CpI of 2005=100

CPI of 2006=56/45*100=124.44

C)inflation rate={CPI(2006)-CPI(2005)}/CPI(2005)*100=124.44-100/100*100=24.44%

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