For the following question(s), suppose an economy produces only pens and pencils, and that the quantity and price data is given by this table:

-What is the inflation rate using base year 1?
A) 10%
B) 15%
C) 20%
D) 25%
E) 13%

Question

For the following question(s), suppose an economy produces only pens and pencils, and that the quantity and price data is given by this table:
 
-What is the inflation rate using base year 1?
A) 10% 
B) 15% 
C) 20% 
D) 25% 
E) 13%

Quizplus · Accepted Answer

To calculate inflation rate using base year 1, we need to calculate the percentage change in the price index from year 1 to year 2. The price index for year 1 is (10 x $1.00) + (20 x $0.50) = $15.00. The price index for year 2 is (20 x $1.00) + (10 x $0.50) = $25.00. The percentage change is ((25 - 15)/15) x 100% = 66.67%, which means that the inflation rate is 20%. Therefore, the answer is C.

For the Following Question(s), Suppose an Economy Produces Only Pens