Final answer:
If Dunkin' Donuts increases the price of coffee, the CPI is likely to capture the change swiftly as it reflects consumer purchases, while it may take longer for the GDP deflator to show the increase due to its broader scope. Both indices may rise if coffee has considerable weight in the consumer basket or GDP.
Step-by-step explanation:
If Dunkin' Donuts increases the price of coffee, then both the Consumer Price Index (CPI) and the GDP deflator may increase, provided that the price increase is reflected in the baskets of goods and services they each measure. The CPI would likely capture the price change quickly, as it tracks consumer purchases such as coffee. However, the GDP deflator's response to the price increase might not be immediate because it includes all domestically produced final goods and services and might have a different composition of goods compared to CPI.
As the price of coffee rises, if it constitutes a significant part of the consumer basket or contributes notably to the nation's GDP, both indices would exhibit an increase. Nonetheless, it is important to note the elasticity of coffee demand is low, indicating that changes in price have relatively small effects on the quantity consumed. Therefore, a price increase in coffee would have a smaller impact on the quantity consumed than goods with higher elasticity.