Question: Calculate the various measures of inflation for the following data. Assume all price indexes are 100 in Year 1.
(A) What factors cause the change in the CPI to overstate the actual rise in the cost of living?
(B) What are the differences between the CPI and the implicit deflator for GDP? Which do you think is a better measure of inflation?
(C) What is a chained price deflator? What are the benefits and drawbacks to this measure of inflation?
(D) Calculate the CPI, implicit consumption deflator, and chained price consumption deflator in years (2) and (3) with these data.
(E) What do you think the ‘‘actual'' rate of inflation was in years (2) and (3)? Explain your answer.