how economists measure changes in prices and income. It uses a simple example with just two goods to illustrate the concepts of a basket of goods, a price index, inflation, nominal income, and real income.
Last year, Maria's income was $1,800. Milk cost $1 per gallon. Bread, which is very expensive where Maria lives, cost $3 per loaf. This year, her income is $3,600. The price of milk increased to $2 per gallon, and the price of bread increased to $9 per loaf.
1) This year, what is the price of a goods basket with 6 gallons of milk and 4 loaves of bread? (Because you will need this answer for a subsequent problem, you should make a note of this amount.)
2)How much did this basket with 6 gallons of milk and 4 loaves of bread cost last year? (Because you will need this answer for a subsequent problem, you should make a note of this amount.)