Question

The table below displays an economy that produces only two goods: rubber ducks and laptop chargers for the years 2015 and 2016. Using the GDP-deflator, the inflation rate between 2015 and 2016 is approximately equal to

 2015 price./quantity 2016 price/quantity rubber ducks \$2 / 3,000 \$3 / 2,000 laptops \$10 / 4,000 \$11.50 / 3,000

13.58%

1.358%

19.12%

1.912%

100%

1%

Ans: 19.12%

Explanation:

Nominal GDP in 2015 = (\$2 * 3000) + (\$10 * 4000) = \$46,000

Real GDP in 2015 = (\$2 * 3000) + (\$10 * 4000) = \$46,000

Since 2015 is base year, Nominal GDP and Real GDP are equal

GDP Deflator = (Nominal GDP / Real GDP) * 100

= (\$46,000 / \$46,000) * 100

= 100

Nominal GDP in 2016 = (\$3 * 2000) + (\$11.50 * 3000) = \$40,500

Real GDP in 2016 = (\$2 * 2000) + (\$10 * 3000) = \$34,000

GDP Deflator = (Nominal GDP / Real GDP) * 100

= (\$40,500 / \$34,000) * 100

= 119.12

The inflation rate between 2015 and 2016 = [(119.12 - 100) / 100] * 100 = 19.12%

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