Question

If a Pennsylvania gun manufacturer raises the price of rifles it sells to the U.S. Army, its price hikes will increase a. both the CPI and the GDP deflator. b. neither the CPI nor the GDP deflator. c. the CPI but not the GDP deflator. d. the GDP deflator but not the CPI.

Answer 1

Answer:

D. The GDP deflator but not the CPI

Explanation:

GDP deflator is a tool used in measuring the changes in prices of goods and services produced in the country. It is measured by dividing nominal GDP with the real GDP. Since the Gun is part of the GDP, hike in prices will affect the GDP deflator.

On the other hand Consumper price index measures changes in prices of basket of goods and services consumed by households. The guns are not been bought by households but rather they are bought by the army in the US. Therefore changes in the price doesn't affect CPI.