Problem
Assume there is a small nation of ten people which idolizes the TV show "American Idol". All they produce and consume are karaoke machines and CDs, in the following amounts:
|
Karaoke Machines
|
CDs
|
|
Quantity
|
Price
|
Quantity
|
Price
|
|
2011
|
10
|
$40
|
30
|
$10
|
|
2012
|
12
|
60
|
50
|
12
|
a) Using 2007 as the base year and fixing the "2007 basket" at 1 karaoke machine and 3 CDs, the cost of this basket in 2007 was $70. Compute the CPI for the year of 2011 and 2012 respectively. Show your work (steps).
b) Using CPI derived in part (a), compute the inflation rate in 2012 (or from 2011 to 2012).
c) Using 2011 as the base year, compute the GDP deflator for year 2011 and 2012. Show your work (steps).
d) Using GDP deflator derived in part (c), compute the inflation rate in 2012.
e) Is the inflation rate in 2012 the same using the two methods?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.