Question

PORTU POETRE Karaoke Machines Price Quantity (Dollars) 2050 21 7 0 CDS Price Quantity (Dollars) 2017 2018 06 . (Note: Using a method similar to that used to calculate the consumer price index, the percentage change in the overall price level is Use 2017 as the base year, and fix the basket at 2 karaoke machine and 6 CDs.) (Note: Again, use Using a method similar to that used to calculate the GOP deflator, the percentage change of the overall price level is 2017 as the base year.) Which of the following statements is correct? Check all that apply. The GDP deflator holds the basket of goods and services constant. The Inflation rate in 2018 is not the same using the two methods The CPI allows the basket of goods and services to change.

Answer 1

Solution:-

(A). Cost of basket in 2017 ($) = 2 x 50 + 6 x 5 = 100 + 30 = 130

Cost of basket, 2018 ($) = 2 x 70 + 6 x 6 = 140 + 36 = 196

CPI, 2017 = 100 (since base year CPI = 100)

CPI, 2018 = (Cost of basket, 2018 / Cost of basket, 2017) x 100 = ($196 / $130) x 100 = 150.77

% Change in price level = % Change in CPI = (150.77 / 100) - 1 = 1.5077 - 1 = 0.5077 = 50.77%

(B). Nominal GDP (NGDP) = $1584330966512_blob.png$(Current year price x Current year quantity)

NGDP, 2017 ($) = 20 x 50 + 60 x 5 = 1000 + 300 = 1300

NGDP, 2018 ($) = 21 x 70 + 80 x 6 = 1470 + 480= 1950

Real GDP (RGDP) = $1584330966509_blob.png$(Base year (2017) price x Current year quantity)

RGDP, 2017 ($) = 20 x 50 + 60 x 5 = 1000 + 300 = 1300

RGDP, 2018 ($) = 21 x 50 + 80 x 5 = 1050 + 400 = 1450

GDP Deflator = (NGDP / RGDP) x 100

GDP Deflator, 2017 = 100 [Since NGDP = RGDP]

GDP Deflator, 2018 = (1950 / 1450) x 100 = 134.48

% Change in price level = % Change in GDP Deflator

                                       = (134.48 / 100) - 1

                                       = 1.3448 - 1

                                       = 0.3448

                                       = 34.48%

(C). Correct statement - the CPI holds the basket of goods and services constant.