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A small nation of ten people idolizes the TV show The Voice. All they produce and consume are karaoke machines and CDs, in the following amounts: a. Using a method similar to the CPI, compute the percentage change in the overall price level. Use 2017 as the base year and fix the basket at 1 karaoke machine and 3 CDs. b. Using a method similar to the GUP deflator, compute the percentage change in the overall price level. Also use 2017 as the base year. c. Is the inflation rate in 2018 the same using the two methods? Explain why or why not.
Principles of Macroeconomics (Mind...
Principles of Macroeconomics (Mind...
A small nation of ten people idolizes the TV show The Voice. All they produce and consume are karaoke machines and CDs, in the following amounts:
a. Using a method similar to the CPI, compute the percentage change in the overall price level. Use 2017 as the base year and fix the basket at 1 karaoke machine and 3 CDs.
b. Using a method similar to the GUP deflator, compute the percentage change in the overall price level. Also use 2017 as the base year.
c. Is the inflation rate in 2018 the same using the two methods? Explain why or why not.
Subpart (a):
Explanation of Solution
Cost of market for the basket can be calculated by using the following formula.
Substitute the respective values in Equation (2) to calculate the cost of market basket in the year 2017:
Cost of market basket for the year 2017 is $70.
Substitute the respective values in Equation (2) to calculate the cost of market basket in the year 2018:
Cost of market basket for the year 2018 is $96
Subpart (b):
Subpart (c):
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