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ECON202: Suggested Answerkey: HW Assignment #1 1. Q #s 6, 7, ands 8 in Ch. 2 problems & applications in the text book #6: Production Price in 2000 Qty in 2000 Price in 2010 Qty in 2010 Market Values 2000 Market Values 2010 Automobiles \$50,000 100 \$60,000 120 5,000,000 7,200,000 Breads \$10 500,000 \$20 400,000 5,000.000 8,000.000 Nominal GDP 10,000,000 15,200,000 a. Nominal GDP: Y2000: \$10M; Y2010: \$15.2M Real GDP: Y2000: \$10M; Y2010: 120X50,000 + 400,000X10 = 6M +4M = \$10M GDP Deflator: Y2000: 1; Y2010: 15.2/10 = 1.52 or, 152% CPI Index: (15,200,000)/(10,000,000) = 152% which is same, why? b. The price went up by 152% under fixed weighted basket (Laspeyres index). The price index under Paasche index is happened to be the same because the basket with its items has not changed over the period. c. I would use the CPI index to make the adjustment for cost of living because the CPI index represents the bundle of goods and services for consumers only. The GDPD, on the other hand, represents the changes in prices of all goods and services in the US economy. Therefore, GDPD measure is based on changes in capital goods and government purchases as a part of the total measures which consumers never buy. Hence, the use of CPI index in adjusting the cost of living is more appropriate. 7. Year Price of Red apple Qty of Red Apple Total Purchase Price of Green apple Qty of Green Apple Total Purchase Y1 \$1 10 \$10 \$2 0 0 Y2 \$2 0 0 \$1 10 \$10 a. The CPI for year 1 is 100 because it is the base year. The CPI index for year 2 is also same because the net effect of changes in price is zero with fixed weighted measure of CPI index. b. The nominal spending for Abby is unchanged at \$10 as the substation from red apple to green apple kept the spending amount same c. Real spending in year 1 is \$10 and real spending is year 1 is also \$10 with no change between the two years.

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