Question

The Data of Macroeconomics-End of Chapter Problenm Abby consumes only apples. In year 1, red apples cost $1 each, green apples cost $2 each, and Abby buys 10 red apples. In year 2, red apples cost $2 each, green apples cost $1 each, and Abby buys 10 green apples. Assume that year 1 is the base year in which the consumer basket is fixed. a. Compute the CPI for apples for each year. Assume that year 1 is the base year in which the consumer basket is fixed. How does your index change from year 1 to year 2? 0 The CPI for year :100 The CPI for year 2 is: 200 CPI has doubled. - b. Compute Abby's nominal spending on apples in each year. How does it change from year 1 to year 2? Nominal Spending in year l: 10 Nominal spending in year 2: 10 Nominal spending hasstayed the same. c. Using year 1 as the base year, compute Abby's real spending on apples in each year. How does it change from year 1 to year 2? Real spending in year 1: $ 10 Real spending in year 2: $ 20 Real spending has doubled

Need help with the answers marked red (they are incorrect). Please don't say the cpi for year 1 is 100 (that is incorrect according to this). Please show work.

Answer 1

Ques 1

CPI for the first year will be the sum of all the apples in year 1 divided by the prices of apples in the base year (Year 1)

That is, $1 + $2 = $ 3

CPI year 1 = ( $3 ) / ( $3) x 100 = 100

CPI year 2 = ( 2 +1 ) / ( 3) x100 = 100

Hence it stayed the same

Ques d

GDP deflator = (Nominal GDP) / (Real GDP) x 100

For Year 1,

Abby buys 10 red apple @ $ 1

Nominal GDP = 10x$1 = $ 10

Real GDP(Year 1 base year) = 10 x $1 = $ 10

GDP Deflator = 100%

For Year 2,

Abby buys 10 green apple @ $ 1

Nominal GDP = 10 x $ 1 = $ 10

Real GDP( Base year 1) = 10 x 2 = $ 20

GDP Deflator = 10/20 x 100 = 50%

Fallen by 50%