Question

The market basket used to calculate the CPI in Aquilonia is 4 loaves of bread, 6 gallons of milk, 2 shirts, and 2 pairs of pants. In 2005, bread cost $1.00 per loaf, milk cost $1.50 per gallon, shirts cost $6.00 each, and pants cost $10.00 per pair. In 2006, bread cost $1.50 per loaf, milk cost $2.00 per gallon, shirts cost $7.00 each, and pants cost $12.00 per pair. Using 2005 as the base year, what was Aquilonia’s inflation rate in 2006?

Answer 1

Answer: Inflation = 22.44%

Step-by-step explanation:

Given :

In 2005

Cost of bread = $1.00 per loaf

Cost of milk = $1.50 per gallon,

Cost of shirt = $6.00 each,

Cost of pant = $10.00 per pair.

whereas,

In 2006

Cost of bread = $1.50 per loaf,

Cost of milk = $2.00 per gallon,

Cost of shirt = $7.00 each,

Cost of pant = $12.00 per pair.

∴
`CPI_(2005)` = [(Cost of bread × Quantity ) + (Cost of milk × Quantity) + (Cost of shirt × Quantity ) + (Cost of bread × Quantity)]

`CPI_(2005)` = $45

Similarly,

`CPI_(2006)` = [(Cost of bread × Quantity ) + (Cost of milk × Quantity) + (Cost of shirt × Quantity ) + (Cost of bread × Quantity)]

`CPI_(2006)` = $56

∴ Inflation =
`[(CPI_(2006) - CPI_(2005))/(CPI_(2005) )]100`

⇒ Inflation = 22.44%