Suppose you are given the following information to answer this set of questions.
|
Item
|
Price in 2005
|
Price in 2006
|
Price in 2006
|
Price in 2007
|
|
Hammers
|
$15.00
|
$17.00
|
$17.00
|
$20.00
|
|
Lawn Mowers
|
$150.00
|
$150.00
|
$180.00
|
$160.00
|
|
Groceries for Year
|
$4800.00
|
$5000.00
|
$5100.00
|
$5200.00
|
|
Bicycle
|
$250.00
|
$250.00
|
$250.00
|
$220.00
|
For this problem assume that the market basket is defined as 1 hammer, 1 lawn mower, 1 unit of groceries for the year, and 2 bicycles. Note in this problem you may want to use a calculator and round all numbers to the nearest hundredth.
a. Compute the cost of the market basket for each year.
1. Cost of market basket in 2005 = ____________________________
2. Cost of market basket in 2006 = ____________________________
3. Cost of market basket in 2007 = ____________________________
4. Cost of market basket in 2008 = ____________________________
b. Calculate the CPI four times. Use 2005 as the base year the first time, then use 2006 as the base year, then 2007 as the base year, and finally 2008 as the base year. Complete the following table with your calculated values.
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Year
|
CPI with Base Year 2005
|
CPI with Base Year 2006
|
CPI with Base Year 2007
|
CPI with Base Year 2008
|
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2005
|
|
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2006
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2007
|
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2008
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c. Calculate the inflation rate between each year using 2005 as the base year. Fill in the following table based on your calculations.
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Time Period
|
Inflation Rate using 2005 as the Base Year
|
|
2005-2006
|
|
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2006-2007
|
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2007-2008
|
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d. Calculate the inflation rate between each year using 2006 as the base year. Fill in the following table based on your calculations.
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Time Period
|
Inflation Rate using 2006 as the Base Year
|
|
2005-2006
|
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2006-2007
|
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2007-2008
|
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e. Calculate the inflation rate between each year using 2007 as the base year. Fill in the following table based on your calculations.
|
Time Period
|
Inflation Rate using 2007 as the Base Year
|
|
2005-2006
|
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2006-2007
|
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2007-2008
|
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f. Calculate the inflation rate between each year using 2008 as the base year. Fill in the following table based on your calculations.
|
Time Period
|
Inflation Rate using 2008 as the Base Year
|
|
2005-2006
|
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|
2006-2007
|
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2007-2008
|
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g. Compare your answers in parts (c), (d), (e), and (f) and explain the reasoning behind your results.