Answer to Question #157836 in Microeconomics for Asif khan

Question

Consider a situation in which yields of tomatoes in a given year is destroyed by some pist attack on crops due to which price of tomatoes being effected. Explain how GDP deflator and cpi account for the price of tomatoes.

Answer 1

The demand of tomatoes will go high since most of the potatoes were destroyed by pests hence decrease in supply thus the high prices of tomatoes. The consumer price index will also increase due to decrease in supply. Basically the prices of tomatoes will be high and this results to inflation.