Question

In general, if a consumer good is produced domestically and consumed domestically, an increase in its price will have which of the following effects? a. The consumer price index will increase relatively more than will the GDP deflator. b. The consumer price index and the GDP deflator will increase by the same amount. c. The consumer price index will increase relatively less than will the GDP deflator. d. One cannot generalize about the increase in the consumer price index relative to the increase in the GDP deflator.

Answer 1

Answer:

a. The consumer price index will increase relatively more than will the GDP deflator.

Explanation:

Generally, using economic indicators, if a consumer good is produced domestically (using local resources or raw materials) and consumed domestically (no importation of such products by the country), an increase in its price will cause the consumer price index to increase relatively more than the GDP deflator.

The consumer price index is a measure used by economists to analyze and examine the weighted aggregate of prices of a basket of goods and services paid for by consumers, these are medical, food, and transportation.

Additionally, GDP deflator, also referred to as the implicit price deflator, is a measure of the level of prices of all domestically produced goods and services in an economy.

Simply stated, Gross Domestic Products (GDP) deflator, measures the effect of inflation on the gross domestic product of a country within a specified period of time (mainly a year).