Referencing Table 24-1, we will calculate the inflation rate in Year 2, using Year 1 as the base year.
Step 1: Calculate the cost of the consumer basket in both years:
Year 1: (15 bushels of peaches * $11) + (10 bushels of pecans * $6) = $165 + $60 = $225
Year 2: (15 bushels of peaches * $9) + (10 bushels of pecans * $10) = $135 + $100 = $235
Step 2: Calculate the Consumer Price Index (CPI) for each year:
CPI for Year 1 (base year): ($225 / $225) * 100 = 100
CPI for Year 2: ($235 / $225) * 100 = 104.4
Step 3: Calculate the inflation rate between the two years:
Inflation rate = [(CPI in Year 2 - CPI in Year 1) / CPI in Year 1] * 100
Inflation rate = [(104.4 - 100) / 100] * 100 = 4.4%
So, the inflation rate in Year 2 was 4.4 percent (option a).
Complete question:
The following table pertains to Pieway, an economy in which the typical consumer's basket consists of 15 bushels of peaches and 10 bushels of pecans.
Year Price of Peaches (Dollars per bushel) Price of Pecans (Dollars per bushel)
Year 1 11 6
Year2 9 10
Refer to Table 24-1. If Year 1 is the base year, then the inflation rate in Year 2 was
a. 4.4 percent.
b. 10 percent.
c. 1.04 percent.
d. 23.5 percent.