Question 1: Inflation is defined as the general increase in average price level. In practical marker, the price of some commodity are increasing, some are decreasing and some are not changing over time. So, an index which is calculated from a basket of goods is used to measure the overall average prices in the economy. Using your understanding of inflation, answer to the following question. A. Suppose a basket of good is consist of 11 different goods and services normally purchase by consumers in Kabul city. The items and their prices in different years are given below in the table. Calculate CPI and inflation if base year is 2009. Calculate CPI and inflation if base year is 2015. (5 Marks) Items 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Cereal 32 34 36 38 40 41 42 43 44 45 48 Chicken 56 56 56 58 58 58 60 60 60 65 65 1/6 Milk 22 22 22 22 23 23 23 23 23 23 23 Coffee 10 12 13 14 15 15 15 15 15 16 16 Fish 52 51 50 49 48 45 44 43 42 41 40 Air Ticket 360 370 380 390 385 382 376 374 377 375 373 Telephone services 120 120 120 123 123 123 125 125 125 128 128 Medicine 400 410 420 423 425 427 429 430 428 425 421 College Education 88 90 94 36 102 110 118 126 136 146 155 Heir cut 45 50 60 75 95 100 110 152 130 140 150 Sport equipment 176 170 160 165 170 178 173 171 164 163 156 B. The CPI index number representing the price level changes from 110 to 115 in one year, and then from 115 to 120 the next year. Since the CPI index number increases by five each year, is five the inflation rate each year? Is the inflation rate the same each year? Explain your answer. (4 Marks) C. The total price of purchasing a basket of goods in Kabul city over four years is: year 1 = Afs 940, year 2 =Afs 970, year 3 = Afs 1000, and year 4 = Afs 1070. Calculate two price CPI indices, one using year 1 as the base year and the other using year 4 as the base year. Then, calculate the inflation rate based on the first price index. Calculate the inflation rate base on the second price index. Are the inflation rates calculated with different base years are different? Why? Why not? (4 Marks)