use this article: https://www.nber.org/system/files/working_papers/w27352/w27352.pdf Based on: Cavallo, Alberto. Inflation with Covid Consumption Baskets. Harvard Business School BGIE

use this article: https://www.nber.org/system/files/working_papers/w27352/w27352.pdf

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Based on: Cavallo, Alberto. "Inflation with Covid Consumption Baskets." Harvard Business School BGIE Unit Working Paper 20-124 (2020). https://www.nber.org/papers/w27352.pdf A. Cavallo shows that there is a difference between inflation calculated with vs. without "COVID consumption baskets". Write down the formula for inflation based on the Fisher index. What parts of the formula are different with vs. without "COVID consumption baskets."? B. Consider the following statement: "When people switch from buying more expensive items, such as plane tickets, to buying less expensive items such as food, inflation will falleven if all prices in the economy remain unchanged." Do you agree or disagree? Why? Explain, using the formula for the Fisher price index. (No more than a few sentences, referencing the formula in part A). C. In the FT article attached at the end of this assignment, Cavallo writes: "In April, what caused a third of the jump was actually in used cars and trucks... The CPI basket should have put less weight on [transport], and [then] you get a lower inflation reading in the month of April." Explain, referencing parts (A) and (B). (No more than a few sentences). D. Cavallo concludes that the 2020 inflation rate calculated with "COVID consumption baskets" was higher than the official CPI. If the Bureau of Labor Statistics (BLS) had based the CPI on a Fisher index instead of a Laspeyres index, would the mismatch between Cavallo's "Covid inflation" and official BLS inflation be larger or smaller? (Explain, no more than a few sentences) Based on: Cavallo, Alberto. "Inflation with Covid Consumption Baskets." Harvard Business School BGIE Unit Working Paper 20-124 (2020). https://www.nber.org/papers/w27352.pdf A. Cavallo shows that there is a difference between inflation calculated with vs. without "COVID consumption baskets". Write down the formula for inflation based on the Fisher index. What parts of the formula are different with vs. without "COVID consumption baskets."? B. Consider the following statement: "When people switch from buying more expensive items, such as plane tickets, to buying less expensive items such as food, inflation will falleven if all prices in the economy remain unchanged." Do you agree or disagree? Why? Explain, using the formula for the Fisher price index. (No more than a few sentences, referencing the formula in part A). C. In the FT article attached at the end of this assignment, Cavallo writes: "In April, what caused a third of the jump was actually in used cars and trucks... The CPI basket should have put less weight on [transport], and [then] you get a lower inflation reading in the month of April." Explain, referencing parts (A) and (B). (No more than a few sentences). D. Cavallo concludes that the 2020 inflation rate calculated with "COVID consumption baskets" was higher than the official CPI. If the Bureau of Labor Statistics (BLS) had based the CPI on a Fisher index instead of a Laspeyres index, would the mismatch between Cavallo's "Covid inflation" and official BLS inflation be larger or smaller? (Explain, no more than a few sentences)