1. 0 percent.
2. 1 percent.
3. -1 percent.
4. 1.5 percent.
Choose the correct answer.
The inflation rate can be calculated in an alternative way if we know the actual prices and quantities of beer and beans produced last year. Suppose that 100 bottles of beer were produced last year at a price of $2 per bottle while 400 kilos of beans were produced at a price of $1 per kilo. The total value of output produced last year was therefore $600, consisting of 100 times $2 of beer and 400 times $1 of beans. According to the question, the price of beer fell by 3 percent, so it becomes $1.94 this year. The price of beans rose by 3 percent, becoming $1.03 this year. The value of last year's output in this year's prices is thus (100)(1.94) + (400)(1.03) = $606.00. This year's price level (i.e., the cost today of the bundle of goods produced last year) was (100)(606/600) = 101. This implies an inflation rate of 1 percent. Notice that the share of beer in total output last year was 200/600 = 1/3.