Question

In the mid-1980s in the U.S., oil prices decreased significantly, which should have caused (a) a...

In the mid-1980s in the U.S., oil prices decreased significantly, which should have caused

(a) a larger decrease in the GDP deflator compared to the CPI.

(b) a larger decrease in the CPI compared to the GDP deflator.

(c) an equal decrease in the CPI and GDP deflator.

(d) no change in the CPI and a decrease in the GDP deflator.

(e) none of the above

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Homework Answers

Answer #1

Option B.

  • We know that CPI measures the changes in the prices of the goods and services in the market basket purchased by a consumer.
  • While a GDP deflator measures only the price changes of goods and services that are produced domestically within a country.
  • Decline of oil prices in mid 1980s was greatly due a decline in the CPI as compared to GDP deflator.
  • This is because the CPI considers the price changes of each and every item in the basket while the GDP deflator does not.
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