The country of Caspir produces only cereal and milk. Quantities and prices of these goods for the last several years are shown in the following table. The base year is 2015.

Question

Cereal Milk
Year Price (Dollars per box) Quantity (Boxes of cereal) Price (Dollars per gallon) Quantity (Gallons)
2015 4.00 100 1.50 180
2016 4.00 120 2.00 200
2017 5.00 150 2.50 200
2018 6.00 180 3.50 240

Refer to the table. This country's inflation rate from 2016 to 2017 was
a.

26.1%.
b.

23.1%.
c.

25.0%.
d.

18.8%.

Answer 1

To calculate the inflation rate from 2016 to 2017, we first need to determine the nominal GDP for both years and then calculate the GDP deflator.

1. Calculate the nominal GDP for each year:

   For 2016:

   • Cereal: \(4.00 \times 120 = 480\)
   • Milk: \(2.00 \times 200 = 400\)
   • Total Nominal GDP for 2016: \(480 + 400 = 880\)

   For 2017:

   • Cereal: \(5.00 \times 150 = 750\)
   • Milk: \(2.50 \times 200 = 500\)
   • Total Nominal GDP for 2017: \(750 + 500 = 1250\)

2. Calculate real GDP using base year prices (2015 prices):

   For 2016 (using 2015 prices):

   • Cereal: \(4.00 \times 120 = 480\) (using 2015 prices)
   • Milk: \(1.50 \times 200 = 300\) (using 2015 prices)
   • Total Real GDP for 2016: \(480 + 300 = 780\)

   For 2017 (using 2015 prices):

   • Cereal: \(4.00 \times 150 = 600\) (using 2015 prices)
   • Milk: \(1.50 \times 200 = 300\) (using 2015 prices)
   • Total Real GDP for 2017: \(600 + 300 = 900\)

3. Calculate the GDP Deflator for each year:

   • GDP Deflator for 2016: \((Nominal GDP/Real GDP) \times 100 = (880 / 780) \times 100 \approx 112.82\)
   • GDP Deflator for 2017: \((Nominal GDP/Real GDP) \times 100 = (1250 / 900) \times 100 \approx 138.89\)

4. Calculate the inflation rate from 2016 to 2017:

   \[ \text{Inflation Rate} = \left(\frac{\text{GDP Deflator in 2017} - \text{GDP Deflator in 2016}}{\text{GDP Deflator in 2016}}\right) \times 100 \]

   \[ \text{Inflation Rate} = \left(\frac{138.89 - 112.82}{112.82}\right) \times 100 \approx \left(\frac{26.07}{112.82}\right) \times 100 \approx 23.1% \]

Thus, the correct answer is: b. 23.1%.