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Use the following table to answer the following questions
Use the following table to answer the following questions.
Year Price of Burgers Quantity of Burgers Price of Magazines Quantity of Magazines
2013 $4 100 $2 180
2014 $5 120 $2.5 200
a. Calculate GDP for 2013 and 2014 using 2013 as the base year.
b. What is the economy's inflation rate?
Expert Solution
a. Computation of GDP for 2013 and 2014 using 2013 as the base year:
GDP for 2013 = (Price of Burgers*Quantity of Burgers)+(Price of Magazines*Quantity of Magazines)
= ($4*100)+($2*180)
= $400 + $360
GDP for 2013 = $760
GDP for 2014 = (Price of Burgers*Quantity of Burgers)+(Price of Magazines*Quantity of Magazines)
= ($4*120)+($2*200)
= $480 + $400
GDP for 2014 = $880
b. Computation of Economy's Inflation Rate:
Real GDP in 2014 = $880
Nominal GDP in 2014 = (Price of Burgers*Quantity of Burgers)+(Price of Magazines*Quantity of Magazines)
= ($5*120)+($2.50*200)
= $600 + $500
GDP for 2014 = $1,100
Nominal GDP in 2014/Real GDP in 2014 = $1,100/$880 = 1.25
Economy's Inflation Rate = 1.25 - 1 = 0.25 or 25%
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