Consider an economy that only produces and consumes two goods-cars and blankets. Suppose the inflation rate based on the consumer price index is higher during the year than that based on the GDP deflator. Assuming underlying tasted and preferences in the economy stay the same, what can you say about the price movements of cars and blankets during the year? The prices of cars and blankets must have changed at different rates, causing consumers to substitute one of the goods for the other. Since the GDP deflator is calculated based on what is actually purchased, it takes that substitution into account. O The relative price of cars and blankets must have remained unchanged. The prices of cars and blankets must have changed at different rates, causing consumers to substitute one of the goods for the other. Because the consumer price index is a fixed-weight index, it understates the rate of inflation in this situation. O Regardless of what happened the prices of cars and blankets during the year, the inflation rate is the inflation rate and the consumer price index and GDP deflator should always give the same number. If they are different, someone as made a calculation error.

Consider an economy that only produces and consumes two goods-cars and blankets. Suppose the inflation rate based on the consumer price index is higher during the year than that based on the GDP deflator. Assuming underlying tasted and preferences in the economy stay the same, what can you say about the price movements of cars and blankets during the year? The prices of cars and blankets must have changed at different rates, causing consumers to substitute one of the goods for the other. Since the GDP deflator is calculated based on what is actually purchased, it takes that substitution into account. O The relative price of cars and blankets must have remained unchanged. The prices of cars and blankets must have changed at different rates, causing consumers to substitute one of the goods for the other. Because the consumer price index is a fixed-weight index, it understates the rate of inflation in this situation. O Regardless of what happened the prices of cars and blankets during the year, the inflation rate is the inflation rate and the consumer price index and GDP deflator should always give the same number. If they are different, someone as made a calculation error.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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