Author Question: Assume that after you graduate, you move to a simple economy in which only three goods are produced ... (Read 59 times)

jparksx · **on:** Jun 29, 2018

Assume that after you graduate, you move to a simple economy in which only three goods are produced and consumed: fish, fruit, and meat.

Suppose that on January 1, fish sold for 2.50 per pound, meat was 3.00 per pound, and fruit was 1.50 per pound. At the end of the year, you discover that the catch was low and that fish prices had increased to 5.00 per pound, but fruit prices stayed at 1.50 per pound, and meat prices had actually fallen to 2.00. Can you say what happened to the overall CPI, in terms of whether it increased, decreased, or stayed the same? Do you have enough information to calculate the inflation rate? Note, this problem requires no calculation; just state and explain your answers.

Question 2

The equation of exchange shows that

A) P = (M V) Y.
B) P = (V M) Y.
C) P = (M V) Y.
D) P = (M Y) V.
E) P - Y = M + V.

memslove · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

You cannot say what happened to the CPI because you do not know the quantities in the market basket. You also do not have enough information to determine the inflation rate because you need the CPI at the beginning and the end of the year to compute the inflation rate.

Answer to Question 2

A