Question

8. The monthly market basket for consumers consists of pizza, t-shirts, and rent. The table below shows market basket quantities and prices for the base year (Year 1) and in the following two years. Base Year (Year 1) Quantity Product Pizza T-Shirts Rent 20 Price in the Base Year $3.00 $10.00 $450.00 Price in Year 2 $3.75 $9.00 $495.00 Price in Year 3 $4.50 $10.50 $562.50 %. (Round both answers to one decimal place.) The inflation rate between Year 1 and Year 2 is The inflation rate between Year 2 and Year 3 is

Answer 1

The nominal GDP can be calculated by multiplying the quantity demanded with price.

So, nominal GDP in year 1 is:

(20)(3) + (3)(10) + (1)(450) = 60 + 30 + 450 = $540

The nominal GDP in year 2 is:

(20)(3.75) + (3)(9) + (1)(495) = 75 + 27 + 495 = $597

The nominal GDP in year 3 is:

(20)(4.50) + (3)(10.50) + (1)(562.50) = 90 + 31.50 + 562.50 = $684

The inflation rate is the percentage change in nominal GDP. So,

$Inflation\:From\:Year\:1\:to\:Year\:2=\frac{597-540}{540}\times100=\frac{57}{540}\times100=10.55$

So, the inflation rate between year 1 and year 2 is 10.5%.

$Inflation\:From\:Year\:2\:to\:Year\:3=\frac{684-597}{597}\times100=\frac{87}{597}\times100=14.57$

So, the inflation rate between year 2 and year 3 is 14.6%.