Question

#49

Table 23-6 The table below contains data for the country of Batterland, which produces only waffles and pancakes. base year is 2009 The Prices and Quantities Year 2008 2009 2010 2011 Price of Waffles S2.00 S2.00 S2.00 S4.00 Quantity of Waffles 100 120 150 180 Price of Pancakes S1.00 $2.00 $3.00 S3.00 Quantity of Pancakes 100 150 200 220 49. Refer to Table 23-6. a. b. с. d. This country's inflation rate from 2008 to 2009 was -25%. 25% 33.3% 100%

Answer is C, but why? I don't understood how they got there. Please walk me through the steps carefully plus the concepts I need to understand; what would you recommend I review to ensure I'll be able to answer these type of questions on my own next time?

Answer 1

Answer 49

The correct answer is (C) 33.3

Inflation rate between from 2008 to 2009 means by how much percentage has Price level increased from 2008 to 2009.

Now Lets calculate Price level of 2008.

In order to calculate one can use GDP deflator.

GDP deflator = (Nominal GDP/ Real GDP)*100

Nominal GDP is the market value of all goods and services produced in the country during the accounting year measured at current year Prices.

Thus Nominal GDP of 2008 = Sum of price * quantity of all goods produced where Price and quantity used are of year 2008.

hence Nominal GDP in 2008 = 2*100 + 1*100 = 300

Real GDP is the market value of all goods and services produced in the country during the accounting year measured at Base year Prices.

Thus Real GDP of 2008 = Sum of price * quantity of all goods produced where Price used are of base year(i.e. 2008) and quantity used are of year 2008.

Hence, Real GDP in 2008 = 2*100 + 2*100 = 400.

Hence Price level in 2008 = GDP deflator in 2008 = (300/400)*100 = 75%

Now lets calculate price level in 2009.

Nominal GDP of 2009 = Sum of price * quantity of all goods produced where Price and quantity used are of year 2009

Real GDP in 2009 = Sum of price * quantity of all goods produced where Price used are of base year(i.e. 2009) and quantity used are of year 2008.

Thus In both cases Price and quantity used are of 2009.

Hence Nominal GDP of 2009 = Real GDP of 2009.

Hence Price level in 2009 = GDP deflator in 2009 = (Nominal GDP/Real GDP)*100 and as Nominal GDP = Real GDP =>

Price level in 2009 = GDP deflator in 2009 = (Nominal GDP/Real GDP)*100 = 100

Hence Price level in 2009 = 100.

NOTE : Price level of Base year is always 100(I have explained the reason above).

hence Price level in 2008 = 75 and Price level in 2009 = 100

Formula :

% change in X = ((New X - Old X) / Old X)*100

Thus, Inflation rate between 2008 to 2009 = ((Price in 2009 - Price in 2008)/ Price in 2008)*100

= ((100 - 75)/75)*100 = 33.3

Hence, Inflation rate between from 2008 to 2009 = 33.3.

Hence the correct answer is (C) 33.3