Which of the following functions are performed by changes in relative prices but not by changes in average prices?
A)Computing real income from nominal income.
B)Indicating an overheating economy.
C)Signaling changes in the desired mix of output.
D)Measuring the rates of inflation.

Question

Quizplus · Accepted Answer

Changes in relative prices signal changes in the desired mix of output and reflect shifts in consumer preferences and changes in the availability of inputs. This is not achieved through changes in average prices which just provide an overall measure of the level of prices. Real income, indicating an overheating economy, and measuring rates of inflation can also be achieved through changes in average prices.

Which of the Following Functions Are Performed by Changes in Relative