Question

Indicate whether each scenario will affect the GDP deflator or the CPI for the United States. Check all that apply. Scenario Shows up in the _____ GDP Deflator CPI
(A) An increase in the price of a Chinese-made car that is popular among U.S. consumers
(B) A decrease in the price of a Waterman Industries deep-water reel, which is a commercial fishing product used for deep-sea fishing, made in the U.S., but not bought by U.S. consumers

Answer 1

Answer:

(A) it will affect the GDP Deflator.

(B) it will affect both the GDP deflator and the CPI

Explanation:

(A) The increase in prices of imports increase real GDP and also the GDP deflator as now the US will purchase less of these cars from china and therefore there will be less imports of this car from china, people will prefer buying local inexpensive cars which will in turn increase the GDP even more than before so therefore this scenario only affects the GDP deflator only as the formula for real GDP is the sum of consumption spending, government spending,government saving( investment) and (exports minus imports) so the less imports we get the more real GDP we get in the US economy.

(B) This will affect both GDP deflator and CPI because firstly this will touch on the exports which will increase and bring in more revenue for the US therefore increasing real GDP because the prices of the fishing product has decreased which will cause the US economy to increase. it will also affect the CPI because now prices of this product have fell therefore the CPI is also going to fall probably causing a deflation.