Suppose a typical basket of goods purchased by consumers contains three beers and five pies. The government has imposed price controls: the price of a pie will stay at $2 forever. The price of beer is allowed to fluctuate freely: the price of a beer was $3 in 2004, then $5 in 2005, and $4 in 2006.

(a) Calculate the CPI for years 2004, 2005, 2006 (assume 2004 is the base year).

[4 marks]

(b) What is the annual rate of inflation (i.e. 2004 to 2005, 2005 to 2006)?

[2 marks]

(c) Explain any two (2) criticisms of the CPI.

[4 marks]