To define inflation and the overall change in
Explanation of Solution
Inflation is defined as a situation in which the general price level of the economy rises continuously. In the given situation there are only three goods in the economy and hence the overall price level can be calculated as the average of the prices of the three items, using the following equation.
The average price in the beginning was $7.33.
It is given that the price of goods changes by the end of the year. The new average index can be calculated as follows,
The average price level by the end of the year is $8. From the calculations it is obvious that the average price level has increased by the end of the year. This is simple method of calculating the overall price level. A better measure of change in price level can be computed if one knows the relative importance or weights of each of these commodities in the consumption basket of individuals.
Concept Introduction:
Inflation: Inflation is defined as a phenomenon in which the overall price level of the economy continues to increase for a period of time. Inflation reduces the
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Chapter 5 Solutions
Principles of Macroeconomics (11th Edition)
- Suppose an economy consumes only two goods: food and entertainment. The following table shows quantities consumed and prices for three years: Year 0 (the base year), Year 1, and Year 2. QUESTION; compute inflation rates (from year 0 to year 1 and from year 1 to year 2) based on GDP deflator Item Year 0 Year 1 Year 2 Quantity (units) Price ($ / unit) Quantity (units) Price ($ / unit) Quantity (units) Price ($ / unit) Food 50 5 75 6 80 4 Entertainment 100 12 110 11 115 14arrow_forwardYou know that the consumer price index (CPI) at the beginning of this year was 150 and the rate of inflation was 8%; this would mean the CPI at the end of the year wasarrow_forwardam. 19.arrow_forward
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- The CPI’s basket of goods includes potato chips, over half of which are made from potatoes grown in Idaho. Wildfires this summer destroyed acres of potato crops in Idaho, causing a spike in the price of potatoes, and there was a 30% increase in the price of potato chips. As a result, the CPI calculation showed an increase of 2% in the Fall of this year versus last year. Please explain if this 2% increase is reflective of the overall price level, and if not, why?arrow_forwardWhat is the current inflation rate as measured by the Consumer Price Index? You can use either the February or March 2022 figure. Describe the pattern of the Consumer Price Index since the beginning of 2020. Describe the pattern of the CPI since 2010. (Hint: Utilize Trading Economics (Links to an external site.) or FRED (Links to an external site.) to get the data. Please note that the inflation rate is not the same thing as the level of the CPI. The inflation rate is measured as the percentage change in the level of the CPI during a period of time.arrow_forwardAssume that a market basket necessary for consumption by a typical household in the economy consists of 300 sandwiches and 3 iPads. In year 2017 the price for one sandwich was $4, and the price of one iPad was $150. In year 2018, the price for one sandwich was $5, and the price of one iPad was $200. Assume that for our analysis we consider year 2017 as the base year. What is the rate of inflation from year 2017 to year 2018? a) 127.27% b) 27.27% c) 20% d) 75%arrow_forward
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