Consider the following basket of goods: 50 hamburgers, 10 textbooks, eight T-shirts, and 100 bottles of water. Suppose that in 2015, each hamburger was $3.50, each textbook was $89.99, each T-shirt was $14, and each bottle of water was $1.50. In 2016, each hamburger was $3.60, each textbook was $95, each T-shirt was $13, and each bottle of water was $1.65. What was the approximate inflation rate in 2016?

Question

Quizplus · Accepted Answer

To calculate the inflation rate, we need to use the formula: ((Price level in year 2 - Price level in year 1) / Price level in year 1) x 100

For hamburgers: ((3.60 - 3.50) / 3.50) x 100 = 2.9%
For textbooks: ((95 - 89.99) / 89.99) x 100 = 6.7%
For T-shirts: ((13 - 14) / 14) x 100 = -7.1%
For water bottles: ((1.65 - 1.50) / 1.50) x 100 = 10%

To find the overall inflation rate, we can weigh each item in proportion to its initial cost:
(50 x 0.029) + (10 x 0.067) + (8 x -0.071) + (100 x 0.1) = 1.45%
Therefore, the approximate inflation rate in 2016 was 4.7% (rounded to one decimal place).

Consider the Following Basket of Goods: 50 Hamburgers, 10 Textbooks