This table gives the monthly purchases of an average consumer in a small economy. Suppose 1977 isthe reference base period unless stated otherwise.ItemQuantity (1977)ClementinesBurritosBags of trail mix90Price (1977)30$0.10$2.0010$1.00$2.00Find the total cost of the market basket for 1977 and 1978.Price (1978)What is the CPI in 1977 and 1978?$0.15$2.25Use the CPIs calculated in part b to find the inflation rate between 1977 and 1978.Recalculate the CPIs using 1978 as the base year. How does the inflation rate change?

Answered: Item Clementines Burritos Bags of trail…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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This table gives the monthly purchases of an average consumer in a small economy. Suppose 1977 is
the reference base period unless stated otherwise.
Item
Quantity (1977)
Clementines
Burritos
Bags of trail mix
90
Price (1977)
30
$0.10
$2.00
10
$1.00
$2.00
Find the total cost of the market basket for 1977 and 1978.
Price (1978)
What is the CPI in 1977 and 1978?
$0.15
$2.25
Use the CPIs calculated in part b to find the inflation rate between 1977 and 1978.
Recalculate the CPIs using 1978 as the base year. How does the inflation rate change?

Expert Solution

Step 1: Define CPI, base year, and inflation rate

The CPI is a measure that is used to track changes in the average price level of a defined basket of products and services over time, usually in comparison to a selected base year. By evaluating the cost of the bundle in a given year with its cost in the initial year, presented as a percentage, it calculates inflation or deflation. The base year serves as a benchmark year for the CPI calculation. It acts as a standard by which price variations in subsequent years are assessed. An inflation rate is a unit of measurement that expresses the percentage change in the overall level of prices over a given time frame, usually a year.

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