Please describe a reasonable way to determine weights for CPI computation. 1 b. What is the difference between CPI and GDP deflator? c. What is a supply shock? How does a supply shock change MPN?

Intermediate Macroeconomics: Homework 2
Due on Monday, 9/24/2018.
1. Consider an economy that produces only three types of fruit: apples, oranges, and
bananas. Production and price data of year 1 are as follows:
Production and price data of year 2 are as follows:
Using year 1 as the base year, please answer the following questions:
(a) Please find the real GDP of year 1 and year 2.
(b) Please find the GDP deflator of year 1 and year 2. Based on the GDP deflator, what is
the inflation rate of year 2?
(c) Let the price index weight of apples be 0.2, bananas be 0.3 and oranges be 0.5, please
find the CPI of year 1 and year 2. Based on the CPI, what is the inflation rate of year 2?

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2. Sam buys a one-year government bond on January 1, 2012, for $500. He receives principal
plus interest totaling $545 on January 1, 2013. Suppose that the CPI is 200 on January 1, 2012,
and 214 on January 1, 2013. This increase in prices is more than Sam had anticipated; his
expectation was that the CPI would be 210 at the beginning of 2013. Please find the nominal
interest rate, the inflation rate, the real interest rate, Sam’s expected inflation rate, and Sam’s
expected real interest rate.
3. Please answer the following questions:
a. Please describe a reasonable way to determine weights for CPI computation.
1
b. What is the difference between CPI and GDP deflator?
c. What is a supply shock? How does a supply shock change MPN?
2

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