Question

The Data of Macroeconomics-End of Chapter Problem Abby consumes only apples. In year 1, red apples cost $1 each, green apples cost $2 each, and Abby buys 10 red apples. In year 2, red apples cost $2 each, green apples cost $1 each, and Abby buys 10 green apples. Assume that year 1 is the base year in which the consumer basket is fixed. a. Compute the CPI for apples for each year. Assume that year 1 is the base year in which the consumer basket is fixed. How does your index change from year 1 to year 2? The CPI for year is:1 The CPI for year 2 is: 2 CPl hasdoubled. b. Compute Abby's nominal spending on apples in cach year. How does it change from year 1 to year 2? Nominal Spending in year : $ 10 Nominal spending in year 2: 10 Nominal spending has stayed the same. c. Using year 1 as the base year, compute Abby's real spending on apples in each year. How does it change from year 1 to year 2? Real spending in year 1: S 10 Real spending in year 2:$ 20 Real spending hasdoubled.

Need help with this, CORRECT ANSWERS ARE ALREADY SHOWN. All I need to know is how to arrive at these answers, please show work

Answer 1

Year	Red apples cost	Green apples cost	Red apples bought	Green apples bought	Nominal spending	Real spending	Deflator
1	1	2	10	nil	10*1+2*0 = 10	10*1+2*0 =10	(10/10)=1
2	2	1	nil	10	2*0+10*1 = 10	0*1+10*2 =20	(10/20)=0.5

Nominal spending = Current price * Quantity in that year

Real spending = Base price * Quantity in that year

Base price = Price in year 1

Deflator = Nominal spending / Real spending

CPI = Cost of basket in current period/ Cost of basket in base period

Fix the basket for year 1 as 10 red apples

Cost of basket in year 1 = 10*1+2*0 = 10 (Base year)

Cost of basket in year 2 = 2*10+1*0= 20

CPI in year 1 = (10/10) = 1

CPI in year 2 = (20/10) = 2

It doubled.

Nominal GDP is same

Real GDP doubled

Deflator fallen by half

Cost of buying apples in both years is same for Abby.