- 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) | Price (2012) |
| Computers | 1 | $1700 | $1200 |
| Books | 10 | $25 | $30 |
| Burgers | 50 | $1.00 | $2.00 |
| Total |
- Explain how the CPI is constructed, and discuss any weaknesses with this measurement technique.
- What type of consumer good is most affected by the business cycle—durable goods or non-durable goods? Why?
- Explain what happens to inflation and unemployment during the business cycle.
- Suppose you are an advisor to the federal government. You are asked to look at macroeconomic data to evaluate whether the economy has entered an economic contraction this year. Which data do you look at? How does the economy behave at the onset of an economic contraction? Explain your answer.
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