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Chapter 17: Problem 3

Consider an economy with only two goods: bread and wine. In the base year, the typical family bought four loaves of bread at \(\$ 2\) per loaf and two bottles of wine for \(\$ 9\) per bottle. In a given year, bread cost \(\$ 3\) per loaf, and wine cost \(\$ 10\) per bottle. The CPI for the given year is a. 100 b. 123 c. 126 d. 130

Short Answer

Expert verified
The CPI for the given year is around 123, which corresponds to option b. 123.

Step by step solution

01

Calculate the cost of the basket in the base year.

In the base year, the family bought 4 loaves of bread at \(\$ 2\) per loaf and 2 bottles of wine at \(\$ 9\) per bottle. We'll compute the total cost of the basket in the base year as follows: Base year cost of the basket = (Number of bread loaves × Price per loaf) + (Number of wine bottles × Price per bottle) Base year cost of the basket = (4 × \(2) + (2 × \)9)
02

Calculate the cost of the basket in the given year.

In the given year, the bread costs \(\$ 3\) per loaf and the wine costs \(\$ 10\) per bottle. We'll compute the total cost of the basket in the given year as follows: Given year cost of the basket = (Number of bread loaves × Price per loaf) + (Number of wine bottles × Price per bottle) Given year cost of the basket = (4 × \(3) + (2 × \)10)
03

Calculate the CPI.

Now we can calculate the CPI by dividing the cost of the basket in the given year by the cost of the basket in the base year and then multiply by 100: CPI = (Given year cost of the basket / Base year cost of the basket) × 100 CPI = ([(4 × \(3) + (2 × \)10)] / [(4 × \(2) + (2 × \)9)]) × 100 Calculate the values in the brackets and substitute into the equation: CPI = ([\(12 + \)20] / [\(8 + \)18]) × 100 CPI = (\(32 / \)26) × 100 Now, divide and multiply: CPI ≈ 1.23 × 100 CPI ≈ 123 The CPI for the given year is around 123, which corresponds to option b. 123.

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Most popular questions from this chapter

Suppose a typical automobile tire cost \(\$ 50\) in the base year and had a useful life of 40,000 miles. Ten years later, the typical automobile tire \(\operatorname{cost} \$ 75\) and had a useful life of 75,000 miles. If no adjustment is made for mileage, the CPI would a. underestimate inflation between the two years. b. overestimate inflation between the two years. c. accurately measure inflation between the two years. d. not measure inflation in this case.

Cost-push inflation is due to a. excess total spending. b. too much money chasing too few goods. c. resource cost increases. d. the economy operating at full employment.

Deflation is a (an) a. increase in most prices. b. decrease in the general price level. c. situation that has never occurred in U.S. history. d. decrease in the inflation rate.

Which of the following statements is true? a. Demand-pull inflation is caused by excess total spending. b. cost-push inflation is caused by an increase in resource costs. c. If nominal interest rates remain the same and the inflation rate falls, real interest rates increase. d. If real interest rates are negative, lenders incur losses. e. All of the above are true.

If the nominal rate of interest is less than the inflation rate, a. lenders win. b. savers win. c. the real interest rate is negative. d. the economy is at full employment.
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