(a)
(a)

Explanation of Solution
Given information:
Price of a green apple in the first year is $2.
Quantity of red apples consumed in the first year is 10.
Price of a red apple in the second year is $2.
Price of a green apple in the second year is $1.
Quantity of green apples consumed in the second year is 10.
Calculation:
To calculate the consumer price index, fix the basket of goods in the first year. Thus, the first year price is considered as base year price; therefore, the consumer price index in the first year is equal to 1. The calculation of CPI (Consumer Price Index) in the second year is shown below:
CPI (Consumer Price Index) in the second year is 2.
Consumer Price index (CPI): Consumer price index is a measure that examines the changes in price levels of a basket of consumer goods and services for the present time from the base year.
(b)
Nominal spending on apples in two years.
(b)

Explanation of Solution
Mr. A purchases 10 red apples in the first year at $1 for each and purchases 10 green apples in the second year at $1. Thus, Mr. A’s nominal spending is $10.
(c)
Real spending on apples in two years.
(c)

Explanation of Solution
Calculation of real spending in both years is shown below:
Real spending of the consumer in the first year is $10.
Real spending of the consumer in the second year is $20. The real spending is doubled.
(d)
Implicit price deflator.
(d)

Explanation of Solution
The general formula for calculating the implicit price deflator is given below:
Substitute the respective values in the above equation to calculate the implicit price deflator in the first year.
Implicit price deflator in the first year is 1.
By using the same equation, the calculation of the implicit price deflator in the second year is shown below:
Implicit price deflator in the second year is 0.5. The implicit price deflator is decreased by half in the second year.
(e)
Cost of living and example of Laspeyres price index and Paasche price index.
(e)

Explanation of Solution
If the consumer assume that, the red apple and green apple are given the same level of utility or both are perfect substitute, the cost of living does not changed. He spends $10 for 10 apples. The consumer price index is a Laspeyres price index and it indicates that the cost of living index is doubled. On the other hand, the implicit price deflator is a Paasche price index. It indicates that the cost of living was fallen half. The reason is it does not consider the changes in the relative price.
Want to see more full solutions like this?
Chapter 2 Solutions
MACROECONOMICS+ACHIEVE 1-TERM AC (LL)
- Critically analyse the five (5) characteristics of Ubuntu and provide examples of how they apply to the National Health Insurance (NHI) in South Africa.arrow_forwardCritically analyse the five (5) characteristics of Ubuntu and provide examples of how they apply to the National Health Insurance (NHI) in South Africa.arrow_forwardOutline the nine (9) consumer rights as specified in the Consumer Rights Act in South Africa.arrow_forward
- In what ways could you show the attractiveness of Philippines in the form of videos/campaigns to foreign investors? Cite 10 examples.arrow_forwardExplain the following terms and provide an example for each term: • Corruption • Fraud • Briberyarrow_forwardIn what ways could you show the attractiveness of a country in the form of videos/campaigns?arrow_forward
- With the VBS scenario in mind, debate with your own words the view that stakeholders are the primary reason why business ethics must be implemented.arrow_forwardThe unethical decisions taken by the VBS management affected the lives of many of their clients who trusted their business and services You are appointed as an ethics officer at Tyme Bank. Advise the management regarding the role of legislation in South Africa in providing the legal framework for business operations.arrow_forwardTyme Bank is a developing bank in South Africa and could potentially encounter challenges similar to those faced by VBS in the future. Explain five (5) benefits of applying business ethics at Tyme Bank to prevent similar ethical scandals.arrow_forward
- Economics (MindTap Course List)EconomicsISBN:9781337617383Author:Roger A. ArnoldPublisher:Cengage LearningExploring EconomicsEconomicsISBN:9781544336329Author:Robert L. SextonPublisher:SAGE Publications, Inc





