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Consumers are observed to substitute away from items in their consumption basket that became more expensive. Which of the following statements are true in relation
Consumers are observed to substitute away from items in their consumption basket that became more expensive. Which of the following statements are true in relation to this fact? I. CPI would overstate inflation relative to PCE. II. PCE would overstate inflation relative to CPI. III. The GDP deflator would capture this substitution effect. a. I only b. II only c. I and III only d. II and III only 2. Suppose an economy produces only apples and oranges. The quantities produced and prices are given by the following table: Year 1 Year 2 Price Quantity Price Quantity Apples $1 20 $2 10 Oranges $2 10 $1 20 Which of the following statements is correct? a. The economy grew in real terms regardless of which base year is used to calculate real GDP b. The economy contracted in real terms regardless of which base year is used to calculate GDP c. The economy produced the same amount regardless of the choice of base year d. Whether economy grew or contracted depends on the choice of the base year
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