Question

1. A certain economy produces only 2 goods, apples and bananas. The quantity produced and price of each is given below in several years. Apples-Q 50 60 70 Apples-P 6 7 8 Bananas-Q 100 105 110 Year 2001 2002 2003 Bananas-P 1.5 Let the CPI basket be 1 apple and 2 bananas. Using 2002 as the base year. Calculate the CPI NGDP and RGDP for each year a. b. What causes inflation?

Please help. Thank you!!!

Answer 1

a. Cost of market basket in 2001 = ($6 * 1) + ($1.5 * 2) = 6 + 3 = $9

    Cost of market basket in 2002 = ($7 * 1) + ($2 * 2) = 7 + 4 = $11

    Cost of market basket in 2003 = ($8 * 1) + ($3 * 2) = 8 + 6 = $14

CPI = (Cost of market basket in current year / Cost of market basket in base year) * 100

CPI in 2001 = ($9 / $11) * 100 = 81.82

CPI in 2002 = ($11 / $11) * 100 = 100

CPI in 2003 = ($14 / $11) * 100 = 127.27

NGDP in 2001 = ($6 * 50) + ($1.5 * 100) = 300 + 150 = $450

RGDP in 2001 = ($7 * 50) + ($2 * 100) = 350 + 200 = $550

NGDP in 2002 = ($7 * 60) + ($2 * 105) = 420 + 210 = $630

RGDP in 2002 = ($7 * 60) + ($2 * 105) = 420 + 210 = $630

NGDP in 2003 = ($8 * 70) + ($3 * 110) = 560 + 330 = $890

RGDP in 2003 = ($7 * 70) + ($2 * 110) = 490 + 220 = $710

b) Inflation is caused by increases in demand which is called demand-pull inflation or increases in cost of production which is called cost-push inflation.