MINDTAP From Cengage Problems & Applications (Ch 06) 5. Problems and Application
ID: 1142874 • Letter: M
Question
MINDTAP From Cengage Problems & Applications (Ch 06) 5. Problems and Applications Q5 A small nation of 10 people idolizes the TV show The Voice. All they produce and consume are karaoke machines and CDs, in the following amounts Karaoke Machines CDs Price Price Quantity (Dollars) Quantity (Dollars) 2017 10 20 50 13 2018 15 30 60 15 Using a method similar to that used to calculate the consumer price index, the percentage change in the overall price level is Use 2017 as the base year, and fix the basket at 1 karaoke machine and 5 Cbs.) Y(Note Using a method similar to that used to calculate the GDP deflator, the percentage change of the overall price level isY use 2017 as the base year.) .Note: Again, Which of the following statements is correct? Check all that apply The inflation rate in 2018 is not the same using the two methods. The GDP deflator holds the basket of goods and services constant. The CPI allows the basket of goods and services to change. Grade It Now Type here to searchExplanation / Answer
a. The cost of the market basket in 2017 is (1 × $20) + (5 × $13) = $85
The cost of the market basket in 2018 is (1 × $30) + (5 × $15) = $105
(105 – 85)/100 × 100% = 20%
b. Nominal GDP for 2017 = (10 × $20) + (50 × $13) = $850.
Nominal GDP for 2018 = (15 × $30) + (60 × $15) = $1,350.
Real GDP for 2017 = (10 × $20) + (50 × $13) = $850.
Real GDP for 2018 = (15 × $20) + (60 × $13) = $1080.
The GDP deflator for 2017 = (850/850) × 100 = 100.
The GDP deflator for 2018 = (1,350/1080) × 100 = 125.
The rate of inflation for 2018 = (125 – 100)/100 × 100% = 25%.
c. Correct is Option C. Inflation rate calculated by CPI holds the basket constant, while GDP deflator allows it to change.
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