During the mid-1980s,we observed a significant reduction in oil prices.In the United States,we would expect that this reduction in oil prices would cause
A)a larger reduction in the CPI compared to the GDP deflator.
B)an equal reduction in the CPI and GDP deflator.
C)a larger reduction in the GDP deflator compared to the CPI.
D)no change in the CPI and a reduction in the GDP deflator.

Question

Quizplus · Accepted Answer

The CPI (Consumer Price Index) measures the average price of a basket of goods and services consumed by urban households, whereas the GDP (Gross Domestic Product) deflator measures the average price of all goods and services produced in the economy. Since oil is a significant input in the production of goods and services, the reduction in oil prices would lead to a reduction in the GDP deflator, but the impact on the CPI would be less significant since it only represents a portion of the overall basket of goods and services consumed by households. Therefore, option A is the best choice.

During the Mid-1980s,we Observed a Significant Reduction in Oil Prices