HW1-Answer Key(4)

5 267189 x100 1413 iv 1090 1000 1000 90

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Unformatted text preview: 100 = 131.5 267/189 x100 = 141.3 iv) = (109.0-100.0) /100.0 = 9.0% = (131.5 -109.0) /109.0 = 20.6% = (141.3-131.5) /131.5 = 7.5% Answer to Q3 (9 Points) All Inflation rates measured by the percentage change in the GDP deflator are smaller than the inflation rates measured by the percentage change in the CPI. This is primarily because the CPI assumes a fixed basket. From 2009 to 2010, there is an increase in the price of chocolate, but the prices of the other consumption goods remain the same, which makes chocolate relatively more expensive. As a result, we observe substitution away from chocolate. In other words, consumption of chocolate would have increased even more, had its price not increased. Instead, consumers 2 Stony Brook University ECO 305 – Summer II, 2013 Arda Aktas 07/11/2013 ___________________________________________________________________________ switched into other goods, in this example into ice cream. The GDP deflator takes this into account, but not the CPI. From 2010 to 2011, the quality of ice cream has increased due to the availability of coo...
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This note was uploaded on 10/22/2013 for the course ECON 305 taught by Professor Yuanliu during the Summer '12 term at SUNY Stony Brook.

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