Inflation, aggregate demand & supply

1. Suppose an economy has only three goods, and the typical family purchases the amounts

given in the following table. If 2005 is the base year, then, what is the CPI for 2012? Show

all working out.

Product

Quantity

(2005)

Price

(2005)

Expenditures

(2005)

Price (2012)

Expenditures (on base

year quantities) (2012)

Computers 1 $1700 $1700 $1200 $1200

Books 10 $25 $250 $30 $300

Burgers 50 $1.00 $50 $2.00 $100

Total   $2000  $1600

 

2. Explain how the CPI is constructed, and discuss any weaknesses with this measurement

technique.

 

3. What type of consumer good is most affected by the business cycle—durable goods or

non-durable goods? Why?

 

4. Explain what happens to inflation and unemployment during the business cycle.

 

5. Explain the three reasons the aggregate demand curve slopes downward.