Question

Suppose a basket of goods and services has been selected to calculate the consumer price index. In 2005, the basket of goods cost $108.00; in 2006, it cost $135.00; and in 2007, it cost $168.75. Which of the following statements is correct?

a. Using 2005 as the base year, the economy’s inflation rate was higher in 2007 than it was in 2006.
b. If 2007 is the base year, then the CPI is 33.75 in 2006.
c. If the CPI is 156.25 in 2007, then 2005 is the base year.
d. Using 2005 as the base year, the economy’s inflation rate for 2006 was 27 percent.

Answer 1

c. If the CPI is 156.25 in 2007, then 2005 is the base year.

Step-by-step explanation:

The formula to compute the consumer price index is shown below:

= (Cost of goods basket in 2007 ÷ Cost of goods basket in 2005) × base year

= ($168.75 ÷ $108) × 100

= 156.25

Since the CPI in 2007 is 156.25 so the base year is 2005.

We simply divide the 2007 basket cost by the 2005 basket cost so that the CPI can come.