The market basket for an imaginary consumer is given below, as are the prices over the course of three years.
Q P1 P2 P3
Good A 3 0.50 0.40 0.30
Good B 5 0.30 0.50 1.00
Good C 8 0.70 1.00 2.00
A. Create a Consumer Price Index with Year 2 as the base year.
B. What is the level of in?ation from Year 1 to Year 2? How about from Year 2 to Year 3?
C. Why might the in?ation rate be overstated by the CPI?