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  Macroeconomics: Question 3   Discuss the problems with the Consumer Price Index

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Macroeconomics:

1. Discuss the problems with the Consumer Price Index.

2. 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.4,000                         30                 Rs.1,000

2021                   12                      6,000                         50                      1,200

1. 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 1 karaoke mic.
2. Using a method similar to the GDP deflator, compute the percentage change in the overall price level. Again, use 2020 as the base year.
3. Is the inflation rate in 2021 the same using the two methods? Explain why or why not.

1. If you are given a choice to live in a country with high level of GDP and low growth rate or to live in a low level of GDP and a high growth rate, which option would you choose and why?
2. Assume a hypothetical society that decides to reduce consumption (production of consumption goods) and increase investment (production of capital goods).
   1. How would this change affect economic growth?
3. What groups in society would benefit from this change? What groups might be hurt?