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Consider that the CPI market basket includes two goods (X and Y), and the spending on...

Consider that the CPI market basket includes two goods (X and Y), and the spending on X constitutes 70% of the overall consumer spending, while the remainder is allocated to Y.

If the price of Y increases by 10% while the price of X decreases by 10% then, all else held constant,

The CPI increases

The CPI decreases

The CPI remains unchanged
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Answer #1

The correct answer is Option (B) The CPI Decreases

Explanation -

Weight of Good X = 70%

Weight of Good Y = 30%

Since price of X declines by 10% and price of Y increases by 10%, the overall impact on CPI can be given as -

Impact on CPI = ( Weight of X * Change in Price ) + ( Weight of Y * Change in Price )

Impact on CPI = ( 0.7 * -0.1 ) + ( 0.3 * 0.1 )

Impact on CPI = -4.00%

Therefore, CPI Decreases.

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