AP Macroeconomics Question 56: Answer and Explanation

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Question: 56

6. The GDP Deflator differs from the CPI in that the GDP Deflator

  • A. is thought to slightly overestimate the inflation rate
  • B. uses base year quantities in its calculations
  • C. incorporates both current year prices and base year prices
  • D. incorporates current year quantities in its calculations
  • E. is the favored price index of the U.S. government

Correct Answer: D

Explanation:

D The CPI uses base year quantities, is favored by the U.S. government, and is thought to slightly overestimate the inflation rate. Both indexes incorporate both current year and base year prices. The GDP Deflator differs from the CPI in its use of current year quantities in its calculations.