In an imaginary economy, consumers buy only hot dogs andhamburgers. The fixed ba

Question

In an imaginary economy, consumers buy only hot dogs andhamburgers. The fixed basket consists of 10 hot dogs and 6hamburgers. A hot dog cost $3 in 2006 and $5.40 in 2007. Ahamburger cost $5 in 2006 and $6 in 2007. Which of the followingstatements is correct?

When 2006 ischosen as the base year, the consumer price index is 90 in2007.
When 2006 ischosen as the base year, the inflation rate is 150 percent in2007.
When 2007 ischosen as the base year, the consumer price index is 100 in2006.
When 2007 ischosen as the base year, the inflation rate is 50 percent in2007. In an imaginary economy, consumers buy only hot dogs andhamburgers. The fixed basket consists of 10 hot dogs and 6hamburgers. A hot dog cost $3 in 2006 and $5.40 in 2007. Ahamburger cost $5 in 2006 and $6 in 2007. Which of the followingstatements is correct? Question 25 answers When 2006 ischosen as the base year, the consumer price index is 90 in2007. When 2006 ischosen as the base year, the inflation rate is 150 percent in2007. When 2007 ischosen as the base year, the consumer price index is 100 in2006. When 2007 ischosen as the base year, the inflation rate is 50 percent in2007.

Explanation / Answer

In 2006, Cost of basket of goods = 10 x $3 + 6 x $5 = $60 In 2007, Cost of basket of goods = 10 x $5.40 + 6 x $6 = $90 So, if we choose year 2006 as our base year CPI for 2006 = 60/60 x 100 = 100 CPI for 2007 = 90/60 x 100 = 150 Inflation rate = (150 - 100)/100 x 100% = 50% Thus, the answer is When 2006 ischosen as the base year, the inflation rate is 150 percent in2007. Hope this helps!

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