1. Assume the value of a market basket for a given year is $550 and the same basket in the base year was $500. Calculate the CPI. 2. If the CPI for a given year is 90 then the change in prices between that year and the base year is 3. Fill in the blanks in the chart below. Start with 2009 as the base year then recalculate with 2010 as the base year.

current price of the CPI basket = $550

base year's price of CPI basket = $500

CPI = (cost of basket in current year / cost of basket in base year) x 100

1) the CPI for the current year = ($550 / $500) x 100 = 110

2) if the CPI decreased to 90, it means that the economy is suffering from deflation or the decrease in the general price level. It would take a 10% decrease in the price level (deflation) to reach a CPI of 90.

3)

nominal GDP real GDP GDP deflator

$100 billion $80 billion 125

$200 billion $100 billion 200

$240 billion $200 billion 120

$300 billion $200 billion 150

$100 billion $80 billion 125