Final answer:
An increase in the price of imported goods raises the Consumer Price Index as it measures prices paid by consumers including imported goods, but does not directly affect the GDP deflator, which only includes domestic goods and services.
Step-by-step explanation:
When the price of imported goods increases, it will lead to an increase in the Consumer Price Index (CPI) but not necessarily affect the GDP deflator. The CPI measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Since imported goods are a part of this basket, a price increase would raise the CPI. The GDP deflator, on the other hand, is a measure of the prices of all goods and services produced domestically, and it reflects the prices of all new, domestically produced, final goods and services in an economy. As imported goods are not produced domestically, they do not directly affect the GDP deflator.
Exploring the foreign price effect, if prices rise in the United States and remain fixed in other countries, U.S. exports become relatively more expensive while imports from abroad become relatively cheaper, which can increase the quantity of imports. However, since the GDP deflator does not include imports, but rather only the prices of domestically produced goods, its value is unaffected by changes in import prices directly. Therefore, an increase in the price of imported goods usually increases the CPI but does not influence the GDP deflator directly.