Please answer all parts Consider an economy that produces only chocolate bars an

Question

Please answer all parts

Consider an economy that produces only chocolate bars and trail mix. The production and prices in each of the three years are represented in the following table. Assume year 1 is the Year 1 Year 2 Year 3 Price Quantity Price QuantityPrice Quantity $4 $3 Chocolate Bars $5 4 $6 5 Trail Mix 3 $5 $4 6 24. In which year does nominal GDP equal real GDPT? a. Year 1 b. Year 2 C. Year 3 d. None of the above 25. Nominal GDP in year 2 is equal to a. $22 b. $30 c. $32 d. None of the above 26. Real GDP in year 3 is equal to a. $38 b. $54 c. $55 d. None of the above 27. Between years 1 and 2, the GDP deflator is a. 73.33 b. 100.00 c. 136.36 d. None of the above 28. Between years 1 and2, the inflation rate (as calculated by the GDP deflator) is a. 26.67% deflation b. Neither inflation nor deflation c, 36.36% inflation d. 136.36% inflation

Explanation / Answer

Ans. This is an interesting question , Let's start answering :

PART 1

24)    a) Year 1

- In year 1 Nominal GDP is equal to the Real GDP because Year 1 is the Base Year.

25) b) $30

- Nominal GDP in Year 2 = $5 × 4 + $5 × 2 = $30.

26) a) $38

- Real GDP in Year 3 = $4 × 5 + $3 × 6 = $38.

27) c) 136.36

- We know that GDP Deflator = Nominal GDP ÷ Real GDP × 100.

Nominal GDP at Year 2 = 30 and Real GDP at Year 2 = 22

GDP Deflator = 30 ÷ 22 × 100 = 136.36

28) c) 36.36 inflation

because GDP deflator = 136.36 , hence inflation = 136.36 - 100 = 36.36.

PART 2

28) b) $7

- 1 × $4 + 1 × $3 = $7 , because both quantities are 1.

29). a) $10

- 1 × $6 + 1 × $4 = $10 , because both quantities are 1 .

30) c) 142.86

- because we know that CPI = ( Value of Market Basket in Year 3 ÷ Value of Market Basket in Year 1 ) × 100

( 10 ÷ 7 ) × 100 = 142.86

31) c) 42.86 % inflation

- because inflation = 142.86( CPI in Year 3 ) - 100 ( CPI in Based Year ) = 42.86

32) c ) GDP Deflator

Because both GDP Deflator and CPI index calculates change in Price over time.

33) c) GDP Deflator Overstates Inflation

This is because GDP calculates the Production of all the goods and does not focus on Demands of the Consumers. Thus if Consumer would shift to Cheaper Goods , it would not effect GDP deflator. Thus GDP deflator overstate Inflation.

I hope you understood the answer. Do ask in case of Doubts.

A Thumsup would be Highly Appreciated !!

Best of Luck !! Keep Chegging !!

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