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

Question

Quizplus · Accepted Answer

Since the price of milk, which constitutes 56% of the typical basket of goods, rises by 7%, it will have a significant impact on the overall consumer price index (CPI). Even though the prices of all other goods fall by 4%, the rise in milk prices will outweigh this decrease, resulting in a higher CPI. Therefore, we can definitely say that the CPI in Bovania is greater than in the previous year.

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