Question

A small nation of 10 people idolizes the TV show The Voice. All they produce and consume are karaoke machines and CDs, in the following amounts:

Karaoke Machines CDs
Price Price
Quantity (Dollars) Quantity (Dollars)
2017 20 30 40 8
2018 25 50 60 10

Using a method similar to that used to calculate the consumer price index, the percentage change in the overall price level is__________

Using a method similar to that used to calculate the GDP deflator, the percentage change of the overall price level is ____________ Which of the following statements is correct? Check all that apply.

a. The inflation rate in 2018 is not the same using the two methods.
b. The CPI allows the basket of goods and services to change.
c. The GDP deflator holds the basket of goods and services constant.

Answer 1

Answer:

1. 52.17%

2. 50.41%

3. a. The inflation rate in 2018 is not the same using the two methods

Explanation:

1.

We are to calculate the % change in overall price level

Market basket:

Year 2017 = (30x2) + (8x4)

= 60 +32

= $92

Year 2018 = (50x2) + (10x4)

= 100+40

= $140

Cpi in 2017 = market basket in this year/market basket in base year x 100

= 92/92 x 100

= 100

Cpi in 2018

= 140/92 x 100

= 152.17

% change = 152.17 - 100 / 100

= 0.5217 x100

= 52.17%

2.

Nominal gdp in year 2017 = (20x30) +(40x8)

= 920 dollars

Real gdp in same year = 920 dollars

Gdp deflator (2018) = nominal/real x 100

= 920/920 x 100

= 100

Real gdp (2018) = (25*30) + (60x8)

= $1230

Nominal gdp(2018) = 25x50 + 60x10

= $1850

Gdp deflator = 1850/1230 x 100

= 150.41

% change in overall price level = 150.41-100/100

= 0.5041 x 100

= 50.41%

3. Using the 2 methods inflation rate in 2018 is not the same. The cpi's rate of inflation holds basket of goods to be fixed. Gdp deflator allows a fluctuation (it changes)