QUESTION 22 For an imaginary economy, the consumer price index was 80 in 2014, 1

Question

QUESTION 22 For an imaginary economy, the consumer price index was 80 in 2014, 100 in 2015, and 140 in 2016. Which of the following statements is correct? a. If the basket of goods that is used to calculate the CPI cost $40 in 2014, then that basket of goods cost S60 in 2015 b. If the basket of goods that is used to calculate the CPI cost $25 in 2015, then that basket of goods cost $35 in 2016 c. The overall level of prices increased by 60 percent between 2014 and 2016. d. All of the above are correct. QUESTION 23 Suppose the price for one gallon of gasoline rises from S3.50 to S4.00 and the price of one gallon of milk rises from $3.00 to $3.20. If the CPI rises from 120 to 132, then people likely will buy a. more gasoline and fewer milk. b.more gasoline and more milk c. less gasoline and fewer milk. d. less gasoline and more milk.

Explanation / Answer

Given that,

Consumer price index(CPI) in 2014 = 80

CPI in 2015 = 100

CPI in 2016 = 140

Now, Let’s first calculate all the possible ratio for CPI calculation

Ratio of CPI 2015 / CPI 2014 = 100 / 80 = 1.25

Ratio of CPI 2016/CPI 2014 = 140/80 = 1.75

Ratio of CPI 2016/CPI 2015 = 140/100 = 1.4

Now, the basket of good which costed $40 in 2014, what will be the cost of same basket in 2015?

Answer is simple, Cost in 2016 = (CPI 2016) / (CPI 2014) * Cost in 2014 = 1.75*40 = $70

Same way, Basket of goods which costed $25 in 2015, cost of same basket in 2016?

Cost of same basket in 2016 = (CPI 2016) / (CPI 2015) * 25 = $25 * 1.4 = $35

Option B seems is the correct answer.

23.

Let’s take two years for our reference i.e. 2014 and 2015

Price of Gasoline in 2014 = $3.5 per gallon

And Price of Gasoline in 2015 = $4 per gallon

Now, given that CPI increased from 120 to 132,

Or the same basket of goods which were costing us in 120 in year 2014, are now worth 132 in the market.

Can we see how much should be the price of Gasoline taking into consideration the CPI?

Price of Gasoline in 2015 should be = (132 /120) * $3.5 = ($3.85)

But the real price in $4 which is more than the CPI adjusted price. It means that Price of Gasoline has increased in terms of price of other items as well.

Now, let’s take into consideration the other good i.e. Milk

Price of Milk in 2014 = $3

Price of milk in 2015 = $3.2

Price of milk considering the CPI = (132/120) * $3 = 1.1*3 = $3.3

But the real price of milk per gallon in 2015 is $3.2. It means that after adjusting for overall inflation or the price increase in the market, we see that the price of milk have increased less than it is expected to increase.

Thus, people will buy more of milk and lesser of gasoline.

Option d seems to be the correct answer.

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