Question

Please check my answer and give feedback. Thank you:)

1. If the prices of Japanese - made shoes imported into Canada increase,

a. Both Canada's GDP deflator and its consumer price index will increase.

b. Both Canada's GDP deflator and its consumer price index will decrease.

c. Canada's GDP deflator will increase, but its consumer price index remains constant.

d. Canada's consumer price index will increase, but its GDP deflator remains constant.

answer: d , because CPI is changed with price but, GDP deflator is about production?

2. Kevin's nominal income in 2017 was $45,000. Suppose that the consumer price index in 2017 was 150. What was Kevin's real income in 2017?

a. $30,000

b. $28,250

c. $45,000

d. $51,750

Answer: a?, I don't have idea because, in CPI, there is no concept of nominal and real as I know. How can I calculate it

3. If increases in the prices of Canadian car insurance cause the consumer price index to increase by 3%, by how much will the GDP deflator likely increase?

a. 0%

b. less than 3%

c. 3%

d. more than 3%

Answer: a? because, GDP deflator is not about price but production?

Answer 1

1.

D

GDP deflator is based on nominal and real GDP that does not consider goods produced outside the country. But, CPI considers as consumers consume imported goods. So, CPI changes, but GDP deflator does not change.

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2.

A

Working note:

Real income in 2017 = 45000*(base year CPI/ CPI in 2017) = 45000*(100/150)

Real income in 2017 = $30000

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3.

B

GDP deflator = (nominal GDP / Real GDP)*100

Since increase in price of car insurance, also increase the nominal GDP, then GDP deflator also increases. but it is less than 3%.