Explain the difference between the CPI and GDP deflator measures of inflation. Which one is likely to measure inflation higher? Why?
What will be an ideal response?
The GDP deflator measures the change in prices of all goods and services included in GDP while the CPI measures the change in price of a basket of goods that typical households consume. Because the CPI uses a fixed basket of goods, it ignores substitution to cheaper goods as well as unmeasured changes in quality, new goods, and unmeasured changes in shopping (such as the increased use of discount stores). As a result, the CPI tends to overestimate inflation and measure inflation higher than the GDP deflator.
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If the dollar appreciates, how will aggregate demand in the United States be affected?
A) Aggregate demand will shift to the right as exports increase. B) Aggregate demand will shift to the right as imports increase. C) Aggregate demand will shift to the left as exports increase. D) Aggregate demand will shift to the left as imports increase.
Jessica makes photo frames. She spends $5 on the materials for each photo frame. She can create one photo frame in an hour. She earns $10 per hour at a part-time job at the local coffee shop. She can sell a photo frame for $30 each. An accountant would calculate the total profit for one photo frame to be
a. $10. b. $15. c. $20. d. $25.