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)The CPI involves a base year;the GDP deflator does not involve a base year.
B)The CPI can be used to compute the inflation rate;the GDP deflator cannot be used to compute the inflation rate.
C)The CPI reflects the prices of goods and services produced domestically;the GDP deflator reflects the prices of all goods and services bought by consumers.
D)The CPI reflects a fixed basket of goods and services;the GDP deflator reflects current production of goods and services.

Question

Quizplus · Accepted Answer

The CPI reflects a fixed basket of goods and services, meaning it measures changes in the prices of the same goods and services over time. The GDP deflator, on the other hand, reflects current production of goods and services, meaning it measures changes in prices of all goods and services produced domestically. Additionally, both the CPI and the GDP deflator can be used to compute the inflation rate, but the CPI is more commonly used for this purpose. Finally, both measures involve a base year, which is used to set the index equal to 100.

The Consumer Price Index and the GDP Deflator Are Two