Question
Assume an economy in which only chocolate and bananas are produced. In the 1st year (year 1), 750 million kilograms of chocolate are produced and
Assume an economy in which only chocolate and bananas are produced. In the 1st year (year 1), 750 million kilograms of chocolate are produced and consumed, and its price is $0.8 per kilogram, while 350 million kilograms of bananas are produced and consumed, and the price is $1.1 per kilogram. In the second year (year 2), 1,200 million kilograms of chocolate are produced and consumed, and its price is $0.95 per kilogram, while 400 million kilograms of bananas are produced, and the price is $1.5 per kilogram.
a) (2 points) Using year 1 as the base year, calculate the GDP price deflator in years 1 and 2, and calculate the rate of inflation between years 1 and 2 from the GDP price deflator.
b) (2 points) Using year 1 as the base year, calculate the CPI in years 1 and 2, and calculate the CPI rate of inflation. Explain any differences in your results between parts (a) and (b)
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