Question

The consumer price index and the GDP deflator are two alternative measures of the overall price level. Which of the following statements about the two measures is correct?

a. A change in the price of imported African coffee is reflected in the U.S. consumer price index but not in the U.S. GDP deflator.

b. A change in the price of heavy construction equipment, such as Caterpillar bulldozers, is reflected in the U.S. consumer price index but not in the U.S. GDP deflator.

c. The two measures are constructed differently, but they always indicate the same inflation rate in the short run.

d. The substitution bias applies equally to both measures

Answer 1

Answer:

given

The consumer price index and the GDP deflator are two alternative measures of the overall price level.

The correct option is: (C)

ie

(c)The two measures are constructed differently, but they always indicate the same inflation rate in the short run.

The consumer price index and the GDP deflator are two alternative measures of the overall price level. The GDP deflator reflects current production of goods and services;

The CPI reflects a fixed basket of goods and services.

The group of goods used to compute the GDP deflator changes automatically, whereas the basket of goods in the consumer price index changes occasionally