Principles Of Macroeconomics
Principles Of Macroeconomics
13th Edition
ISBN: 9780135162163
Author: CASE, Karl E., Fair, Ray C., Oster, Sharon M.
Publisher: Pearson,
Question
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Chapter 7, Problem 2.3P
To determine

Bundle price indexation and inflation.

Expert Solution & Answer
Check Mark

Explanation of Solution

The bundle price in 2016 can be calculated as follows:

Bundle price2016=[(PriceX×QuantityX)+(PriceY×QuantityY)+(PriceZ×QuantityZ)]=[(2×50)+(3×125)+(0.75×100)]=100+375+75=550

The bundle price in 2016 is $550.

Index in 2016 is calculated as follows:

Index in 2016 = Bundle price2016Bundle price2016×100=550550×100=100

The index in 2016 is 100.

The bundle price in 2017 can be calculated as follows:

Bundle price2017=[(PriceX×QuantityX)+(PriceY×QuantityY)+(PriceZ×QuantityZ)]=[(1.5×50)+(3×125)+(1.25×100)]=75+375+125=575

The bundle price in 2017 is $575.

Index in 2017 is calculated as follows:

Index in 2017 = Bundle price2017Bundle price2016×100=575550×100=104.5

The index in 2017 is 104.5.

The bundle price in 2018 can be calculated as follows:

Bundle price2018=[(PriceX×QuantityX)+(PriceY×QuantityY)+(PriceZ×QuantityZ)]=[(2×50)+(2.5×125)+(1.5×100)]=100+312.50+150=562.50

The bundle price in 2018 is $562.50.

Index in 2018 is calculated as follows:

Index in 2018 = Bundle price2018Bundle price2016×100=562.5550×100=102.3

The index in 2018 is 102.3.

The percentage change in index between 2016 and 2017 is calculated as follows:

Percentage change= Index2017Index2016Index2016×100=104.5100100×100=4.5%

The percentage change in index between 2016 and 2017 is 4.5%.

The percentage change in index between 2017 and 2018 is calculated as follows:

Percentage change= Index2018Index2017Index2017×100=102.3104.5104.5×100=220104.5=2.1%

The percentage change in index between 2017 and 2018 is -2.1%.

There was no inflation between 2017 and 2018 as there was a decrease in the price level between 2017 and 2018.

Economics Concept Introduction

Inflation: Inflation is the situation of abnormal price hike in the economy which leads to the situation of too much money chasing too few goods.

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