Answer:
1. Using a method similar to that used to calculate the consumer price index, the percentage change in the overall price level is;
Value of market basket of the good in 2017
= (50 * 2) + (5 * 6)
= $130
Value of market basket of the good in 2018
= (70 * 2) + (6 * 6)
= $176
CPI in 2017
= 130/ 130 * 100
= 100
CPI in 2018
= 176 / 130 * 100
= 135.38
Percentage change
= (135.38 - 100)/100
= 35.38%.
2. Using a method similar to that used to calculate the GDP deflator, the percentage change of the overall price level is ;
Nominal GDP in 2017
= (50 * 20) + (5 * 60)
= $1,300
Nominal GDP in 2018
= (70 * 21) + (6 * 80)
= $1,950
Real GDP using 2017 prices
Real GDP in 2017
= (50 * 20) + (5 * 60)
= $1,300
Real GDP in 2018
= (50 * 21) + (5 * 80)
= $1,450
GDP deflator in 2017
= (Nominal GDP in 2020 / Real GDP in 2020) * 100
= (1,300 / 1,300) * 100
= 100
GDP deflator in 2021
= (Nominal GDP in 2021 / Real GDP in 2021) * 100
= (1,950 / 1,450) * 100
= 134.48
Percentage Change
= [(134.48 - 100) / 100] * 100
= 34.48%
3. Which of the following statements is correct
a. The inflation rate in 2018 is not the same using the two methods.
b. The GDP deflator allows the basket of goods and services to change.
