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How does it change from year 1 to year 2?
How does it change from year 1 to year 2? Answer: Real spending is 10 year-1 dollar in year 1, and 20 year-1 dollar in year 2. d. Defining the implicit price 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? Answer: The implicit price deflator is 1 in year 1, and 0.5 in year 2. Inflation is -50%. E. Suppose that Abby is equally happy eating red or green apples. How much has the true cost of living increased for Abby? Compare this answer to your answers to parts (a) and (d). What does this example tell you about Laspeyres and Paasche price indexes?