Changes in the relative prices of goods causes problems measuring real GDP because
A)they tend to be inaccurate.
B)firms produce more of the cheaper good.
C)consumers buy less of the cheaper good.
D)consumers change their buying habits.
E)price deflators only measure the price level.

Question

Quizplus · Accepted Answer

When the relative prices of goods change, consumers may change their buying habits and consume more of the cheaper good, causing an increase in real GDP even though there has been no increase in the total amount of goods and services produced. This is called the substitution effect and can lead to inaccuracies in measuring real GDP.

Changes in the Relative Prices of Goods Causes Problems Measuring