Principles of Macroeconomics (MindTap Course List)
8th Edition
ISBN: 9781305971509
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Chapter 11, Problem 4CQQ
To determine
Thesubstitution effect with CPI and GDP deflator.
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Because consumers can sometimes substitutecheaper goods for those that have risen in price,a. the CPI overstates inflation.b. the CPI understates inflation.c. the GDP deflator overstates inflation.d. the GDP deflator understates inflation.
Please dont answer Question 1. Just the scenario for Question 2.
Computing the CPI:
1. The table below shows a hypothetical typical consumer’s market basket that consists of 10 units of beef and 20 units of chicken.
Year Price of Beef Price of Chicken
2018 $4 $4
2019 $5 $5
2020 $9 $6
A. Compute the CPI in 2019.
B. What is the CPI inflation rate from 2019-2020? CPI vs. GDP deflator:
2. In each scenario, determine the effects on the CPI and the GDP deflator: A. Starbucks raises the price of Frappuccino (assuming Frappuccino is in the CPI basket).
B. Caterpillar raises the price of the industrial tractors it manufactures at its Illinois factory.
C. Armani raises the price of the Italian jeans it sells in the U.S. (assuming this good is included…
An economy produces two goods, x, and y. A year ago the price of x was $4 and the price of y was $6. Today the price of x is $8 and the price of y is $10. What happened to the nominal and the real value of good x? What happened to the nominal and real value of good y?
Chapter 11 Solutions
Principles of Macroeconomics (MindTap Course List)
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- Calculate the Inflation rate using the information given: Consumer spend $2000 on food, $2000 on clothing, $1000 on health and 5000 on entertainment. The price of food rises by 5%, the price of clothing falls by 10%, the price of health services rises by 30% the price of entertainment rises by 20%. In 2004, the Chinese government became concerned about the country’s inflation rate. The price level was being driven up mainly by rising raw material and energy prices. Ministries in the Chinese government were anxious to reduce inflation rate, as they were worried about its possible effects on the country exports and savings. A) Was China suffering mainly from cost-push inflation or demand pull inflation in 2004? B) Why may inflation have a harmful effect on the country’s exports and imports? C) Explain one other cost imposed by inflation on an economy.arrow_forwardWhich do you think has a greater effect on the CPI:a 10 percent increase in the price of chicken or a10 percent increase in the price of caviar? Why?arrow_forwardComputing the CPI: 1. The table below shows a hypothetical typical consumer’s market basket that consists of 10 units of beef and 20 units of chicken. Year Price of Beef Price of Chicken 2018 $4 $4 2019 $5 $5 2020 $9 $6 A. Compute the CPI in 2019. B. What is the CPI inflation rate from 2019-2020? CPI vs. GDP deflator: 2. In each scenario, determine the effects on the CPI and the GDP deflator: A. Starbucks raises the price of Frappuccino (assuming Frappuccino is in the CPI basket). B. Caterpillar raises the price of the industrial tractors it manufactures at its Illinois factory. C. Armani raises the price of the Italian jeans it sells in the U.S. (assuming this good is included in the CPI basket). Correcting dollar figures from different…arrow_forward
- Inflation represents the rate of increase of the average price of goods. If inflation decreases from 10% to 5%, does the average price of goods decrease? Explain.arrow_forwardThe table shows the CPI in Genovia. Calculate the inflation rates in 2017 and 2018. Did the CPI rise in 2018? Did the inflation rate increase in 2018? >>> Answer to 1 decimal place. Genovia's inflation rate in 2017 was nothing percent. Genovia's inflation rate in 2018 was nothing percent. In 2018, Genovia's CPI _______ and its inflation rate _______. A. increased; increased B. decreased; decreased C. decreased; remained constant D. increased; decreased Year CPI 2016 104 2017 108 2018 110arrow_forwardSuppose that typical CPI basket for consumers contains 3 goods: 5 wheels of cheese, 3 t-shirts, and 10 gallons of gasoline. The prices of the goods in 2019 and 2020 are listed below: Item Prices 2019 Prices 2020 Cheese $5 $10 T-shirt $10 $15 Gallon of Gasoline $3 $6 A) Find the cost of the CPI Basket in 2019: B) Find the cost of the CPI Basket in 2020: C) Using 2019 as the base reference period, calculate the CPI for 2020 D) What is the inflation rate in 2020? E) Suppose that you made $40,000 in 2019 and $41,000 in 2020. What has happened to your real income from 2019 to 2020?arrow_forward
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