Suppose there are only two goods (Good A and Good B)and the average person buys 4 of Good A in a year and 3 of Good B. If, in the base year, the Price of Good A is $5 and the Price of Good B is $10, and in the next year the Price of Good A is $6 and the Price of Good B is $9, the inflation that occurred in the second year is

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Quizplus · Accepted Answer

To calculate the inflation rate, we first determine the total spending in each year. In the base year, spending on Good A is 4 units * $5 = $20, and on Good B is 3 units * $10 = $30, for a total of $50. In the next year, spending on Good A is 4 units * $6 = $24, and on Good B is 3 units * $9 = $27, for a total of $51. The inflation rate is the percentage increase in total spending, which is ($51 - $50) / $50 = 0.02 or 2%, not 10%. My initial calculation was incorrect; the correct inflation rate based on the provided calculation method is indeed 2%, not 10%.

Suppose There Are Only Two Goods (Good a and Good