Consider the economy described in Problem 4.

a. Use the prices for 2009 as the set of common prices to compute real GDP in 2009 and in 2010. Compute the GDP deflator for 2009 and for 2010, and compute the rate of inflation from 2009 to 2010.

b. Use the prices for 2010 as the set of common prices to compute real GDP in 2009 and in 2010. Compute the GDP deflator for 2009 and for 2010 and compute the rate of inflation from 2009 to 2010.

c. Why are the two rates of inflation different? Which one is correct? Explain your answer.

Data from problem 4

An economy produces three goods: cars, computers, and oranges.
Quantities and prices per unit for years 2009 and 2010 are as follows:

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Cars Computers Oranges 2009 Quantity Price 10 $2000 4 $1000 1000 $1 2010 Quantity Price $3000 $500 $1 12 6 1000