question archive 1) The Island economy produces cars and books
1) The Island economy produces cars and books
Subject:EconomicsPrice: Bought3
1) The Island economy produces cars and books. The following table contains the quantities and prices of its products. The consumption basket of a typical household of the Island economy includes 1 car and 40 books. Year 2006 2007 Quantity of Cars 200 300 Price of Cars $10,000 $20,000 Quantity of Books 60,000 80,000 Price of Books $40 $20 a. Compute the CPI in 2007, using 2006 as the base year. Show your work. b. Determine the price level change from 2006 to 2007 using the CPI. Show your work. C. Explain the 2 methods used to measure inflation. What are the differences between these methods? d. Explain 2 reasons why high inflation rates have a negative effect on the economy. 2. Consider the following statement. Determine if they are TRUE or FALSE. If TRUE, explain why. If FALSE, explain why and then rewrite the statement to make it TRUE. a. Lenders are likely to benefit from unexpected inflation. b. Inflation is usually due either to greedy workers who want to earn more or to greedy retailers who want to charge higher prices for their products. C. Bob deposits $100 in a bank account that pays an annual interest rate of 5 percent. A year later, Bob withdraws his $105. If inflation was 7 percent during the year the money was deposited, then Bob's purchasing power has increased by 2 percent. d. Substitution bias causes the CPI to understate the increase in the cost of living from one year to the next e. When the price of nuclear missiles rises, this change is reflected in the CPI but not in the GDP deflator. 3. Suppose the market basket is 40 apples, 1 computer and 10 pizzas. 1998 is the base year. Use the following information about the economy: 3 is the base vear. year apples quantity computers price quantity $1100 70 pizza quantity price price $7 1997 $0.45 475 380 1998 $0.48 510 $1050 85 $8 390 1999 $0.50 500 $1000 100 $9 400 a. Find the CPI in 1997, 1998, and 1999. Show your work. b. Find the percentage change in the price level from 1997 to 1998 and from 1998 to 1999. Show your work. C. Describe and explain the 2 major reasons for inflation.
