Question

The average, urban family of four in the peculiar country of Rushland consumes only three goods: slices of pizza, beef tacos, and banana muffins. The table below provides the quantities of these goods that the average, urban family of four consumed and the price of each good in 2017, 2018, and 2019. Year Quantity of Price of Pizza Quantity Price of a Pizza (in slices) (per slice of Tacos Taco Quantity of Price of a Muffins Muffin 2017 130 $4.50 160 $2.50 210 $1.75 2018 135 $4.50 158 $2.40 212 $1.70 2019 134 $4.75 163 $2.60 209 $1.95 Suppose that 2017 is the base year, and that the CPI basket is comprised of the quantities of these goods that the average, urban family of four consumed in 2017. Calculate the: 1) CPI in each of the three years, and 2) the inflation rate in 2018 and 2019. Additionally, identify whether the price level has fallen or risen in 2018 and 2019, and explain whether inflation or deflation has occurred in 2018 and 2019. Your submission should explain the process of completing your calculations, but you do not need to provide the actual formulas or calculations themselves. Round all answers to the nearest one-hundredth (one- hundredth of one percent, for answers that are percentages).

Answer 1

1. The CPI is , ie the ratio of cost of basket in base year in t^th year's prices and cost of basket at base year times 100.

CPI = -* 100 cost of basket at base year

The CPI for the base year would be
130 * 4.5+ 160* 2.5+ 210* 1.75 130 * 4.5+ 160* 2.5+210 * 1.75 2017
or $CPI_{2017} = \frac{1352.5}{1352.5}*100$ or
CP/2017 = 100
.

The CPI for 2018 would be
130 * 4.5+ 160* 2.4+ 210 * 1.7 CP/2018 = ? 1352.5 - 100
or
1326 CP/2018 = 19** 100
or
CP/2018 = 98.0407
.

The CPI for 2019 would be
130 * 4.75+ 160* 2.6 +210* 1.95 CP/2019 = ? * 10C 1352.5
or $CPI_{2019} = \frac{1443}{1352.5}*100$ or
CP/2019 = 106.6913
.

2. The inflation is calculated by CPI as $i_t = \frac{CPI_t - CPI_{t-1}}{CPI_{t-1}}*100$ . The inflation in 2018 would be $i_{2018} = \frac{CPI_{2018} - CPI_{2017}}{CPI_{2017}}*100$ or $i_{2018} = \frac{98.0407 - 100}{100}*100$ or percent.

72018 = -1.9593

The inflation in 2019 would be $i_{2019} = \frac{CPI_{2019} - CPI_{2018}}{CPI_{2018}}*100$ or
2018 = 106.6913-18.10407 - * 100 98.01
or percent.

The CPI in 2018 is less than CPI in 2017, reflecting the fact that the prices have fallen in 2018. The CPI in 2019 is more than CPI in 2018, reflecting the fact that the prices have risen in 2019.

The inflation in 2018 is negative, meaning that deflation has occurred, while inflation in 2019 is positive, meaning that inflation has occurred.