In Bovania,milk constitutes 56 percent of the typical basket of goods for a typical consumer.Let's say the price of milk rises by 7 percent and the prices of all other goods fall by 4 percent.Based on the information given,we can definitely say
A) the consumer price index (CPI)in Bovania is greater than in the previous year.
B) the consumer price index (CPI)in Bovania is less than in the previous year.
C) if consumers get a 4 percent pay raise,they are worse off in terms of their real income compared to inflation as measured by the Bovanian consumer price index (CPI).
D) the gross domestic product (GDP)deflator must be higher than the consumer price index (CPI).
E) the gross domestic product (GDP)deflator must be less than the consumer price index (CPI).

Question

Quizplus · Accepted Answer

Since milk constitutes a large portion of the typical consumer's basket of goods, a rise in its price will have a significant impact on the overall consumer price index (CPI). Additionally, the fact that other goods are experiencing a price decrease will not be significant enough to counteract the increase in milk prices. Therefore, the CPI in Bovania will likely be greater than in the previous year.

In Bovania,milk Constitutes 56 Percent of the Typical Basket of Goods