The GDP deflator is NOT a fixed-quantity price index, but the CPI is. What is the significance of this fact?
A) The GDP deflator does not include enough items in its market basket.
B) A base year cannot be defined for the GDP deflator.
C) The GDP deflator reflects not only changes in prices, but also changes in consumption patterns as consumers substitute between goods.
D) The GDP deflator overstates the true rate of inflation, whereas the CPI understates it.

Question

Quizplus · Accepted Answer

The fact that the GDP deflator reflects changes in consumption patterns as consumers substitute between goods is significant because it means that it is a more accurate measure of inflation as it accounts for changes in how people spend their money. In contrast, the fixed-quantity market basket used to calculate the CPI does not account for this type of substitution effect.

The GDP Deflator Is NOT a Fixed-Quantity Price Index, but the CPI