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Illustrate implications of changing the composition of cpi

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The Bank of Canada regularly announces the inflation rate. Many economic aspects, such as employment, wages, loans, interest rates, and business contracts are influenced by the announced inflation rate. Thus, the way the inflation rate is determined has important consequences on many people's lives. Let us construct a very simplified economic model to illustrate the implications of changing the composition of the CPI basket, which in turn determines how the inflation rate is calculated.

Think of an economy consisting of two people, Betty and Trent. They only consume books and food: Betty receives meals for free from a foreign admirer, and she only buys 20 books a week for the price of $4 apiece. Trent has no time to read, so that he buys 14 meals a week for the price of $10 apiece.

Reference no: EM132051682

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