The people on Coral Island buy only juice and cloth. The CPI basket contains the

Question

The people on Coral Island buy only juice and cloth. The CPI basket contains the quantities bought in 2010. The average household spent $36 on juice and $60 on cloth in 2010 when the price of juice war $2 a bottle and the price of cloth is $6 a yard. In the current year, 2011, juice is $6 a bottle and cloth is $5 a yard. Calculate the CPI and the inflation rate in 2011. The CPI in 2011 is >>> Answer to 1 decimal place The inflation rate in 2011 is percent. >>> Answer to 1 decimal place >>> If your answer is negative, include a minus sign. If your answer is positive, do not include a plus sign

Explanation / Answer

In 2010 a household averagely spent $36 on juice that means he/she will buy($36 / $2) = 18 bottles of juice as juice price at that time is $2 a bottle.

Similarly as we know that in 2010, price of cloth is $6 a yard,that means he/she will buy ($60 / $6) = 10 yard of clothes as the household spent $16 on clothes on an average.

Now we knew the amount of juice and clothes that they buy.

Now, in 2011 price of juice increases to $6 per bottle.That means he/she will now spent ($6 * 18) = $108 and spent ($5 * 10) = $50 on clothes.

Now Consumer Price Index (CPI) =

[(cost of cpi market basket at current price) / (cost of cpi market basket at base price)] * 100.

CPI of 2011 = [(108 + 50) / (36 + 60)] * 100

=> CPI of 2011 = (158 / 96) * 100

=> CPI of 2014 = 164.6%.

Now the rate of inflation is calculated as (change in CPI between 2010 and 2011) * 100

As we know that at base year CPI is 100%.

Now the change in CPI between 2010 & 2011 is (164.60 - 100) = 64.60.

So Inflation Rate = (64.6 / 164.6) * 100 = 39.2%.

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