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Under the chain rule, we compare the GDP of each two consecutive years in terms of prices that prevail in the earlier year. For example,

Under the chain rule, we compare the GDP of each two consecutive years in terms of prices that prevail in the earlier year. For example, to compare 2017 and 2018, we must first calculate GDP in both years in 2017 prices. Consider an economy that produces only two goods, bread and cheese. The following statistics are available about this economy. In the following questions, round your answers to two decimal places.

2017: Base Year 2018 2019

Quantity Price Quantity Price Quantity Price

Bread 40 1 50 2 50 1

Cheese 30 2 26 2 30 4

A. What is the growth rate of the real chain-rule GDP between 2017 and 2018?

B. What is the growth rate of the chain-rule GDP between 2018 and 2019?

C. What is the chain-rule GDP of 2019 valued in terms of constant 2017 dollars?

D. In the above question, if the chain-rule GDP is used as the measure of real GDP, what is the rate of inflation of the GDP deflator in 2018 and in 2019?

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