Knowee
Questions
Features
Study Tools

Consider an economy that produces only good A and good B. In year 1, this economy produced 12,000 units of good A and 8,000 units of good B. In year 2, this economy produced 11,000 units of good A and 8,500 units of good B. The per unit prices in each year are given in the table below. Year 1 Year 2Good A $500 $300Good B $550 $350Assuming year 1 to be the base year, find the level of inflation using GDP deflators. Group of answer choices9.8%12.11%10.1%13.7%

Question

Consider an economy that produces only good A and good B. In year 1, this economy produced 12,000 units of good A and 8,000 units of good B. In year 2, this economy produced 11,000 units of good A and 8,500 units of good B. The per unit prices in each year are given in the table below. Year 1 Year 2Good A 500500 300Good B 550550 350Assuming year 1 to be the base year, find the level of inflation using GDP deflators. Group of answer choices9.8%12.11%10.1%13.7%

...expand
🧐 Not the exact question you are looking for?Go ask a question

Solution

To calculate the level of inflation using GDP deflators, we first need to calculate the nominal GDP and real GDP for both years.

  1. Calculate the Nominal GDP: Nominal GDP is calculated as the sum of the quantity of goods produced multiplied by the current price of those goods.

    For Year 1: Nominal GDP = (Quantity of Good A * Price of Good A) + (Quantity of Good B * Price of Good B) Nominal GDP = (12,000 * 500)+(8,000∗500) + (8,000 * 550) = 6,000,000+6,000,000 + 4,400,000 = $10,400,000

    For Year 2: Nominal GDP = (11,000 * 300)+(8,500∗300) + (8,500 * 350) = 3,300,000+3,300,000 + 2,975,000 = $6,275,000

  2. Calculate the Real GDP: Real GDP is calculated as the sum of the quantity of goods produced multiplied by the base year price of those goods.

    For Year 2 (with Year 1 as the base year): Real GDP = (Quantity of Good A * Base Year Price of Good A) + (Quantity of Good B * Base Year Price of Good B) Real GDP = (11,000 * 500)+(8,500∗500) + (8,500 * 550) = 5,500,000+5,500,000 + 4,675,000 = $10,175,000

  3. Calculate the GDP Deflator: The GDP deflator is calculated as (Nominal GDP / Real GDP) * 100.

    For Year 1: GDP Deflator = (10,400,000/10,400,000 / 10,400,000) * 100 = 100

    For Year 2: GDP Deflator = (6,275,000/6,275,000 / 10,175,000) * 100 = 61.67

  4. Calculate the Inflation Rate: The inflation rate is calculated as the percentage change in the GDP deflator from the base year to the current year.

    Inflation Rate = [(GDP Deflator in Year 2 - GDP Deflator in Year 1) / GDP Deflator in Year 1] * 100 Inflation Rate = [(61.67 - 100) / 100] * 100 = -38.33%

This indicates deflation rather than inflation. The negative sign indicates that prices have fallen from Year 1 to Year 2. The options provided do not match the calculated result. Please check the data or the question again.

This problem has been solved

Similar Questions

Suppose that in 1994 the total output in a single-good economy was 10,000 buckets of chicken. Also suppose that in 1994 each bucket of chicken was priced at $16. Finally, assume that in 2015 the price per bucket of chicken was $20 and that 22,000 buckets were produced. Instructions: In parts a-b, enter your answer rounded to 1 decimal place. In part c, enter your answers as a whole number. a. What is the GDP price index for 1994, using 2015 as the base year?       b. By what percentage did the price level, as measured by this index, rise between 1994 and 2015?      percent c. What were the amounts of real GDP in 1994 and 2015?      In 1994, real GDP = $       In 2015, real GDP = $

Suppose that James’s income in Year 1 was $40,000. Over the next four years his income increases by 7% per year. At the same time, the economy experiences an inflation rate of 5% per year.  a. Complete the table below. Do not round your intermediate calculations. Enter your final responses as a whole number for Nominal income and Real income. Enter your final responses for the price index rounded to one decimal place. Year Nominal income Price index Real income1 $40,000 100 $ 2 3 4 5 b. At the end of Year 5, James’s real income will be $ .

Suppose the total expenditure for a market basket of goods in year 1 (the base year) is $200 billion. In year 2 the expenditure for the same market basket of goods is $220 billion. What is the CPI for the economy in year 2?Group of answer choices22090109110120

1.       The following data is given for a Country which only produces two goods (A and B) for the base year (Ym) and the current year (Yn). YmYnGoodPriceQuantityPriceQuantityAPAmQAmPAnQAnBPBmQBmPBnQBnWhat is the expression for GDP deflator for the current year?

Consider the following table:The economy in the base year 2018 produced:Item Quantity PriceCoffee 20 cups $3 per cupPizza 22 pizzas $10 per pizzaBeer 40 litres $3 per litreIn 2019 the same economy produced:   Item Quantity PriceCoffee 24 cups $2 per cupPizza 25 pizzas $9 per pizzaBeer 42 litres $3.50 per litre                Which of the following is the rate of consumer price inflation and real GDP growth between 2018 and 2019?Group of answer choicesCPI inflation is -6.25% and real GDP growth is 11.1%CPI inflation is 11.1% and real GDP growth is -6.25%CPI inflation is 12% and real GDP growth is -5.5%CPI inflation is -5.5% and real GDP growth is 12%CPI inflation is -5.5% and real GDP growth is 10%

1/3

Upgrade your grade with Knowee

Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.