Rec03_sol

Marketpricesandquantitiesremainasgiveninthetablerecalc

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Unformatted text preview: e sneakers and boots are made in the US, the umbrellas are imported from China. For the entire question, use 2009 as the base year. a) Compute the CPI for all three years. Compute the Inflation Rate between 2009‐2010 and 2010‐2011 only. Page 3 of 7 b) Compute the GDP Deflator for all three years and state all inflation rates that can be computed from the given data. Why might your answers to a) and b) turn out differently? c) For this part only, assume the government mandates that all umbrellas will now be produced in the USA. Market prices and quantities remain as given in the table. Recalculate your answer to parts a) and b) for the inflation rate between 2009‐2010 only. What has changed? d) Suppose a new firm enters the market for footwear and introduces the Boot 2.0, which is twice as durable as the original boots, and much cheaper. Is the CPI an accurate measure of the costs of living? Why or why not? e) From the data in the table alone, state a source of bias that might cause the CPI to overstate the costs of living. Explain. Solutions: a. Price of the basket: 2009: 546 2010: 488 2011: 725 CPI: 2009: 100 2010: 89.38 2011: 132.78 Inflation: 2010: ‐10.62% 2011: +48.556% b. GDP: Nominal and Real 2009: 1500 1500 2010: 4800 5400 2011:3600 7530 GDP Deflator 2009: 100 2010: 88.89 2011: 47.81 I...
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