Which of the following is true? ?Both the CPI and the GDP deflator probably over

Question

Which of the following is true?

?Both the CPI and the GDP deflator probably overstate the inflation rate.

?The GDP deflator generally rises substantially faster than the CPI during inflationary conditions.

?The GDP deflator includes fewer goods than the CPI.

?The CPI and the GDP deflator tend to move in opposite directions.

?The GDP deflator tends to be much more volatile than the CPI.

?Both the CPI and the GDP deflator probably overstate the inflation rate.

?The GDP deflator generally rises substantially faster than the CPI during inflationary conditions.

?The GDP deflator includes fewer goods than the CPI.

?The CPI and the GDP deflator tend to move in opposite directions.

?The GDP deflator tends to be much more volatile than the CPI.

Explanation / Answer

GDp deflator includes all goods and services produced domestically and not the ones imported whereas the CPI consumer price index includes goods and services both domestic and imported but oNly the ones bought by the consumers, not all the goods. So the number of goods in GDP deflator are more than that in CPI. So option C is incorrect.

Both CPI and GDP deflator tend to move in same direction even though the number of goods are different.

CPI is overstated as it includes only consumer goods so an increase in the price of consuemr goods will inctease CPI even when the price of other goods is same. So CPI overstates inflation but GDP deflator tends to shpw the correct measure since it includes all the domestically produced goods and services. So GDP deflator generally does not overstate inflation.

In gdp deflator due to large nunber of goods and services being included the effevt of any one of them is smaller on the index but in CPI there are few goods and services so it tends to be more volatile.

Since CPI inclides certain fixed goods and services in cases of inflationary conditions , GDP deflator tends to incraese faster becaise it includes all goods and services produced domestically.

So answer iz B)

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