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Abby consumes only apples. In year 1, red apples cost $1 each, green apples cost $2 each, and Abby buys only 10 red apples. In year 2, red apples cost $2, green apple costs $1, and Abby buys only 10 green apples.
a. Compute a consumer price index for apples for each year. Assume that year 1 is the base year in which the consumer bsaket is fixed. How does your index change from year 1 to year 2?
b. Compute Abby's nominal spending (Hint: use the same idea to calculate nominal GDP). How does it change from year 1 to year 2?
c. Using year 1 as the base year, Abby's real spending (Hint: use the same idea to calculate real GDP) on apples in each year. How does it change from year 1 to year 2?
d. Defining the deflator as nominal spending divided by real spending, compute the deflator for each year. How does the deflator change from year 1 to year 2? Compare this answer to part ‘a'.
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