Answer #7 offset changes in the cost of iving. Will youuse the GDP deflator or the CPI? Why?7. Abby consumes only apples. In year 1, red applescost $1 cach, green apples cost $2 each, andAbby buys 10 red apples. In year 2, red apples CHAPTER 2 The Data of Macroeconomics | 43cost $2, green apples cost $1, and Abby buys 10green apples.a. Compute a consumer price index for applesfor each year. Assume that year 1 is the baseyear in which the consumer basket is fixed.How does your index change from year 1 toar.year 2?b. Compute Abby's nominal spending on applesin each year. How does it change from year 1to year 2?c. Using year 1 as the base year, compute Abby'sreal spending on apples in each year. Howdoes it change from year 1 to year 2d. Defining the implicit price deflator asnominal spending divided by real spendingcompute the deflator for each year. Howdoes the deflator change from year 1 toyear 2?e. Suppose that Abby is equally happy eat-ing red or green apples. How much hasthe true cost of living increased for Abby?Compare this answer to your answers toparts (a) and (d). What does this exampletellyou about Laspeyres and Paasche priceindexes?

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Answered: Answer #7

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Answer #7

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Answer #7

offset changes in the cost of iving. Will you
use the GDP deflator or the CPI? Why?
7. Abby consumes only apples. In year 1, red apples
cost $1 cach, green apples cost $2 each, and
Abby buys 10 red apples. In year 2, red apples

CHAPTER 2 The Data of Macroeconomics | 43
cost $2, green apples cost $1, and Abby buys 10
green apples.
a. Compute a consumer price index 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
ar.
year 2?
b. Compute Abby's nominal spending on apples
in each year. How does it change from year 1
to year 2?
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
d. Defining the implicit price deflator as
nominal spending divided by real spending
compute the deflator for each year. How
does the deflator change from year 1 to
year 2?
e. Suppose that Abby is equally happy eat-
ing red or green apples. How much has
the true cost of living increased for Abby?
Compare this answer to your answers to
parts (a) and (d). What does this example
tell
you about Laspeyres and Paasche price
indexes?

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