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HW1-Answer Key(4) - Stony Brook University ECO 305 Summer...

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Stony Brook University ECO 305 Summer II, 2013 Arda Aktas 07/11/2013 ___________________________________________________________________________ 1 Homework 1 Answer Key Answer to Q1 (10 points) i) Since base year is 2009, we fix Qs to Q of 2009 but let prices changes : Cost of basket of goods in 2009 = = 8x4 + 10x2 +12x3 = $88 Cost of basket of goods in 2010 = = 8x5 + 10x2 +12x3 = $96 Cost of basket of goods in 2011 = = 8x5 + 10x3 +12x4 = $118 Cost of basket of goods in 2012 = = 8x6 + 10x5 +12x5 = $158 ii) = (88/88) x 100 = 100 = (96/88) x 100 = 109.1 = (118/88) x 100 = 134.1 = (158/88) x 100 = 179.5 iii) = (109.1 - 100.0) /100.0= 9.1% = (134.1 - 109.1) /109.1 = 22.9% = (179.5- 134.1) /134.1 = 33.9% Answer to Q2 (10 Points) i) = 8x4 + 10x2 + 12x3= $88 = 9x5 + 14x2 + 12x3 = $109 = 9x5 + 18x3 + 12x4 + 2x8 = $163 = 10x6 + 20x5 + 15x5 + 8x4 = $267 ii) = 8x4 + 10x2 + 12x3 =$88 = 9x4 + 14x2 + 12x3 =$100 = 9x4 + 18x2 + 12x3+2x8 =$124 = 10x4 + 20x2 + 15x3 + 8x8 = $189
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Stony Brook University ECO 305 Summer II, 2013 Arda Aktas 07/11/2013 ___________________________________________________________________________ 2 iii) 88/88x100=100 109/100 x 100 = 109 163/124 x 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
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