# Chapter 17. Question 15

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Question 15
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You must read each slide, and complete any questions on the slide, in sequence.

Suppose the country of Snowland uses the following market basket of goods to determine its consumer price index, with Year 1 being the base year with a CPI of 100. Nominal GDP is also provided.

 Market basket items: Year 1 Year 2 Year 3 Year 4 Loaf of bread \$2.50 \$2.80 \$3.00 \$3.10 Movie ticket \$8.00 \$8.80 \$9.20 \$9.50 Gallon of gasoline \$3.50 \$4.20 \$4.00 \$3.60 Scented candle \$12.00 \$13.20 \$14.00 \$14.30 Nominal GDP \$5 billion \$5.6 billion \$6.1 billion \$6.5 billion

### Question

A. Calculate the CPI in Snowland for each year, using Year 1 as the base year with CPI = 100.

Year 1: b0g0iQ1whKk=

Year 2: s151GBiLhP22M1PQ

Year 3: wauay2qOGG/yl/kL

Year 4: aiNR3gLT7BNUYUEM

Incorrect! Use the formula CPI = (Cost in Current Period ÷ Cost in Base Period) × 100. For each column, first calculate the sum of the four listed product prices. The Year 1 total is \$26. Since we are told that the base year is Year 1,CPI in Year 1 is (\$26 ÷ \$26) × 100 = 100. For Year 2, the total is \$29, and (\$29 ÷ \$26) × 100 = 111.538. Year 3’s CPI is (\$30.20 ÷ \$26) × 100 = 116.154, and Year 4’s CPI = (\$30.50 ÷ \$26) × 100 = 117.308.
Correct! Use the formula CPI = (Cost in Current Period ÷ Cost in Base Period) × 100. For each column, first calculate the sum of the four listed product prices. The Year 1 total is \$26. Since we are told that the base year is Year 1,CPI in Year 1 is (\$26 ÷ \$26) × 100 = 100. For Year 2, the total is \$29, and (\$29 ÷ \$26) × 100 = 111.538. Year 3’s CPI is (\$30.20 ÷ \$26) × 100 = 116.154, and Year 4’s CPI = (\$30.50 ÷ \$26) × 100 = 117.308.

[link to Consumer Price Index in ebook]

### Question

B. Calculate the rate of inflation (based on CPI) in Year 2, Year 3, and Year 4.

Year 2: Rnu4qR5SH9nAtx0S%

Year 3: tzPu7m/T1cN0v4Fy%

Year 4: k+WR+Wvp/gf/RC1Q%

Incorrect! The percentage change in price is calculated by the formula [(CPI in Current Year ÷ CPI in Original Year) × 100] – 100. For Year 2, inflation is [(111.538 ÷ 100) × 100] 100 = 11.538%. For Year 3, inflation is [(116.154 ÷ 111.538) × 100] – 100 = 4.138%. In Year 4, inflation is [(117.308 ÷ 116.154) × 100] – 100 = 0.994%.
Correct! The percentage change in price is calculated by the formula [(CPI in Current Year ÷ CPI in Original Year) × 100] – 100. For Year 2, inflation is [(111.538 ÷ 100) × 100] 100 = 11.538%. For Year 3, inflation is [(116.154 ÷ 111.538) × 100] – 100 = 4.138%. In Year 4, inflation is [(117.308 ÷ 116.154) × 100] – 100 = 0.994%.

[link to p. 455 in etext]

### Question

C. Using the CPI, calculate the real GDP in each of the four years.

Year 1: \$DYU2tVvtzEQ= billion

Year 2: \$Mh3qIEoErh9pYYm2 billion

Year 3: \$L9HBIFa/IPoBLnrp billion

Year 4: \$nuhFguEX9/YkH85a billion

Incorrect! Use the formula for real GDP: Real = Nominal × (Base Year Index ÷ Current Year Index). For year 1, real GDP (in billions of dollars) = 5 x (100/100) = 5. Year 2’s real GDP (in billions of dollars) is 5.6 x (100/111.538) = 5.021. Year 3’s real GDP (in billions of dollars) is 6.1 x (100/116.154) = 5.252. In Year 4, real GDP (in billions of dollars) is 6.5 x (100/117.308) = 5.541.
Correct! Use the formula for real GDP: Real = Nominal × (Base Year Index ÷ Current Year Index). For year 1, real GDP (in billions of dollars) = 5 x (100/100) = 5. Year 2’s real GDP (in billions of dollars) is 5.6 x (100/111.538) = 5.021. Year 3’s real GDP (in billions of dollars) is 6.1 x (100/116.154) = 5.252. In Year 4, real GDP (in billions of dollars) is 6.5 x (100/117.308) = 5.541.

[link to Deflating Series: Nominal Versus Real Values on p. 457 in etext]

### Question

D. Between Year 1 and Year 4, the proportion of the total increase in nominal GDP due to inflation was about r6rjeHeqoy4= (write in number) percent.
Incorrect! First calculate the increase in nominal GDP between Year 1 and Year 4: (\$6.5/\$5 – 1) × 100 = 30%. Next, calculate the increase in the CPI between Year 1 and Year 4: (117.308/100 – 1) × 100 = 17.31%. Finally, calculate the portion of the increase in nominal GDP due to inflation: 17.31/30 = 57.8%.
Correct! First calculate the increase in nominal GDP between Year 1 and Year 4: (\$6.5/\$5 – 1) × 100 = 30%. Next, calculate the increase in the CPI between Year 1 and Year 4: (117.308/100 – 1) × 100 = 17.31%. Finally, calculate the portion of the increase in nominal GDP due to inflation: 17.31/30 = 57.8%.

[link to “Deflating Series” p. 457 in etext]