Part B. Price Indexes and Inflation The CPI (consumer price index) and PGDP (GDP Deflator, GDP...

Part B. Price Indexes and Inflation

The CPI (consumer price index) and PGDP (GDP Deflator, GDP price index) have the following values.

Year

CPI

(1982-84 = 100)

PGDP

(2012 = 100)

2019

256

112

2020

258

113

The CPI figures are for the month of June. The GDP Deflator figures are for the second quarter of the year.

B1. Why is the level of the CPI higher than that of the GDP deflator, that is, in the 250s rather than only in the 110s?

B2. What is CPI inflation in 2020? What is GDP inflation in 2020? Carry the answers to two decimal places. Show your computations.

B3. What is the explanation for the difference in the inflation rates, even though the years involved are the same?

B4. (i) What are the uses of the CPI? What are the uses of the GDP Deflator? (ii) What are the advantages of the CPI? What are the advantages of the GDP Deflator?

B5. Suppose that inflation of three percent is expected (anticipated) in 2021? How do financial markets ensure that neither borrowers nor lenders suffer as a consequence? [Hint: Assume that the "real interest rate" is unchanged.]

Solutions

Expert Solution

Rahul Sunny answered 1 year ago

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