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Tutorial Chapter 24

Tutorial Chapter 24 - CPI =(Price of a basket of goods and...

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Tutorial Chapter 24 Question 1 1. The CPI and GDP deflator both rise. 2. The GDP deflator rises, the CPI does not. 3. The CPI rises, the GDP deflator does not. Question 2 1. Compute the cost of the basket: Cost in Year 1 (\$10 per football x 3 footballs) + (\$12 per basketball x 4 basketballs) = \$78 per basket Cost in Year 2 (\$12 per football x 3 footballs) + (\$15 per basketball x 4 basketballs) = \$96 per basket Cost in Year 3 (\$14 per football x 3 footballs) + (\$18 per basketball x 4 basketballs) = \$114 per basket 2. Using Year 1 as the base year, compute the index: To calculate the Consumer Price Index, the following formula is used:
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Unformatted text preview: CPI = (Price of a basket of goods and services / price of the basket in base year) X 100 Thus: CPI in Year 1 (\$78/\$78) X 100 = 100 CPI in Year 2 (\$96/\$78) X 100 = 123 CPI in Year 3 (\$114/\$78) X 100 = 146 3. Compute the inflation rate: Inflation rate is the percentage change in the price index from the preceding period. To calculate the inflation rate, the following formula is used Inflation rate for year (2) = CPI (in year 2) – CPI (in year 1)/ CPI (in year 1) X 100 Thus: Inflation rate for Year 2 (123 -100)/100 x 100 = 23% Inflation rate for Year 3 (146- 123)/123 x 100 = 19%...
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