Consider that the CPI market basket includes two goods (X and Y), and the spending on X constitutes 70% of the overall consumer spending, while the remainder is allocated to Y.

If the price of Y increases by 10% while the price of X decreases by 10% then, all else held constant,

a. The CPI increases
b. The CPI decreases
c. The CPI remains unchanged

b. The CPI decreases

Explanation:

The Consumer Price Index (CPI) measures any change in the price level of a weighted average market basket of consumer goods and services.

It is stated that Good X constitutes 70% of consumer spending and Good Y constitutes the remainder which would be 30%.

If X decreases by 10% and Y increases by 10%, what would happen to the CPI?

Because the CPI is a weighted average, we can use the following,

Change in CPI = 0.7(-0.1) + 0.3(0.1)

= -7 + 3

= -4%

This means that the CPI will DECREASE by 4% because the price decrease occured in the Good with the higher Consumer Budget share.

a

explanation:

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is this good enough?