Question 3

a)Discuss the problems with the Consumer Price Index.

b)Consider a nation obsessed with Coke Studio. All they produce and consume are DVDs and karaoke mics, in the following amounts:

Karaoke Mics DVDs

Quantity Price Quantity Price

2020 10 Rs.4,00030 Rs.1,000

2021 126,000 501,200

a.Using a method similar to the CPI, compute the percentage change in the overall price level. Use 2020 as the base year and fix the basket at 3 DVDs and 1karaoke mic.

b.Using a method similar to the GDP deflator, compute the percentage change in the overall price level. Again, use 2020 as the base year.

c.Is the inflation rate in 2021 the same using the two methods? Explain why or why not.