Chegg Guided Solutions for Principles of Microeconomics 4th Edition: Chapter 17

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  • Step 1 of 2

    Calculating the CPI:

    a.       The cost of the basket in the base year is $200 + $600 + $100 + $50 = $950.  In the subsequent year the same basket of goods costs $220 + $640 + $120 + $40 = $1020.  The CPI in the subsequent year equals the cost of the basket in that year relative to the base year:.  Since the CPI in the base year is 1.000, the rate of inflation (equal to the percentage increase in the CPI) between the base year and the subsequent year is 7.4%.

  • Step 2 of 2

    b.      The family’s nominal income rose by 5%, which is less than the increase in the family’s cost of living.  The family is thus worse off in terms of real purchasing power.

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