Price Indices and Inflation

QUESTION ONE
a. Distinguish between the Consumer Price Index (CPI) and the Producer Price Index (PPI).
b. The table below shows the distribution of goods in the consumer basket of a given country, Ashkonomania.
Prices (Ghyuan)

Quantity 2012 2016 2017
Fuel 2 12.50 16.00 19.50
Kenkey 5 0.70 0.75 1.00
Rice 4 1.50 2.50 3.15
Fish 3 0.80 1.00 0.95
Drinks 3 0.90 0.85 1.00
Clothing 2 2.00 2.10 2.35
Soap 1 0.45 0.45 0.55

i. Explain the importance of the quantities of the commodities in the table above in measurement of the CPI.
ii. Using 2012 as the base year, obtain the consumer price indices for 2016 and 2017 (to 3 s.f.) respectively and interprete your answers.
iii. Determine the percentage change in the CPI between 2016 and 2017.

QUESTION TWO
The table below provides a snapshot of a two-sector economy.

Income Consumption Investment
0 300 300
400 600 h
800 a 300
b 1200 i
1600 1500
c 1800 300
2400 d k
e 2400 300
3200 2700 L
3600
f 300
4000 g 300

a. Determine the marginal propensity to consume (MPC) from the schedule.
b. Giving a basis, find the missing values in the table.
c. Calculate the level of savings at each level of income and deduce the income range within which there is dissavings.
d. At what level of income is equilibrium attained?
e. Estimate the savings and consumption functions for this economy
f. Determine i. the average propensity to consume (APC) at income level 2400
ii. the average propensity to save (APS) at income level 3600.