A small nation of ten people idolizes the TV show American Idol. All they produce and consume are karaoke machines and CDs, in the following amounts:
Karaoke Machines CDs
Quantity Price Quantity Price
2009 10 $40 30 $10
2010 12 $60 50 $12
a. Using a method similar to the consumer price index, compute the percentage change in the overall price level. Use 2009 as the base year, and fix the basket at 1 karaoke machine and 3 CDs.
b. Using a method similar to the GDP deflator, compute the percentage change of the overall price level. Also use 2009 as the base year.
c. Is the inflation rate in 2010 the same using the two methods? Explain why or why not.
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