Final answer:
The correct answer is d) All of the above are true. The GDP deflator accounts for government and business investments and adjusts nominal GDP to real GDP, capturing all domestically produced goods and services without the biases present in CPI or PPI.
Step-by-step explanation:
The GDP deflator is a price index that reflects the prices of all domestically produced goods and services in an economy. When considering the statement about the GDP deflator, the correct answer is d) All of the above are true. This is because the GDP deflator takes government purchases into account, unlike the Consumer Price Index (CPI). It also takes business investment purchases into account, which the CPI does not, as CPI focuses on consumer goods and services. Finally, the GDP deflator is generally used to adjust nominal GDP to calculate real GDP, which shows the economy's output adjusted for changes in the price level, thus providing a more accurate picture of economic growth without the distortion of inflation.
An example of a situation where using the GDP deflator to convert from nominal to real would be more appropriate than using the CPI could be when a government is trying to measure the real growth of its economy over the years, as it includes all goods and services produced within the country. In contrast, the CPI would be more useful for understanding the cost of living changes as experienced by consumers.