select the correct answer. what are the year - 2 cpi and the rate of inflation from year 1 to year 2 for a…

select the correct answer. what are the year - 2 cpi and the rate of inflation from year 1 to year 2 for a basket of goods that costs $25.00 in year 1 and $25.50 in year 2? a. the cpi is 25.50, and the rate of inflation is 2%. b. the cpi is 98.03, and the rate of inflation is 1%. c. the cpi is 98.03, and the rate of inflation is 2%. d. the cpi is 102.00, and the rate of inflation is 1%. e. the cpi is 102.00, and the rate of inflation is 2%.

select the correct answer. what are the year - 2 cpi and the rate of inflation from year 1 to year 2 for a basket of goods that costs $25.00 in year 1 and $25.50 in year 2? a. the cpi is 25.50, and the rate of inflation is 2%. b. the cpi is 98.03, and the rate of inflation is 1%. c. the cpi is 98.03, and the rate of inflation is 2%. d. the cpi is 102.00, and the rate of inflation is 1%. e. the cpi is 102.00, and the rate of inflation is 2%.

Answer

Explanation:

Step1: Recall inflation - rate formula

The formula for the inflation rate is $\text{Inflation rate}=\frac{CPI_{year2}-CPI_{year1}}{CPI_{year1}}\times100%$. If we assume $CPI_{year1} = 25$ (since the cost of the basket is $25$ in year - 1 and we can set the base - year CPI as 100, here we can also use the ratio method directly) and $CPI_{year2}=25.50$.

Step2: Calculate the inflation rate

$\text{Inflation rate}=\frac{25.50 - 25}{25}\times100%=\frac{0.50}{25}\times100% = 2%$. And the CPI in year 2 is calculated based on the formula $CPI=\frac{\text{Cost of basket in year 2}}{\text{Cost of basket in base - year}}\times100$. Here, if year 1 is the base - year with cost of basket = 25 and cost of basket in year 2 = 25.50, then $CPI_{year2}=\frac{25.50}{25}\times100 = 102$.

Answer:

A. The CPI is 25.50, and the rate of inflation is 2%.