Question
Suppose that a consumer basket is composed of 3 loaves of bread and 5 gallons of milk. The following were the prices of 1 loaf
2010: pb = 2 pm = 3
2011: pb = 2 pm = 4
2014: pb = 3.5 pm = 2.5
2015: pb = 4 pm = 3.25
a) Using 2010 as the base year, please calculate the CPI for each of the four years. Next, using the CPIs that you just calculated, please compute the inflation rate from 2014 to 2015.
b) Using 2011 as the base year, please calculate the CPI for each of the four years. Next, using the CPIs that you just calculated, please compute the inflation rate from 2014 to 2015.
c) Are the two inflation rates that you calculated in parts a) and b) the same? If so, what is the main insight that you can draw from this conclusion?
d) Suppose you earned $100 in 2011. What would have been the value of this $100 in 2015 dollars?
e) Suppose a good friend of yours earned $783 in 2014. What would have been the value of this $783 in 2010 dollars?
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