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An increase in the price of forklifts imported into the United States from Belgium will:

A. increase the consumer price index and the GDP deflator.
B. increase the consumer price index but not the GDP deflator.
C. increase the GDP deflator but not the consumer price index.
D. increase the GDP deflator and the producer price index.
E. have no effect on the consumer price index or the GDP deflator.

1 Answer

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Final answer:

An increase in the price of imported forklifts from Belgium will increase the Consumer Price Index (CPI) but not the GDP deflator, as the CPI includes imports but the GDP deflator only measures domestic production.

Step-by-step explanation:

The correct answer is B: increase the consumer price index but not the GDP deflator. The Consumer Price Index (CPI) measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services, which includes imported items like forklifts. If the price of imported forklifts increases, the CPI will likely rise as this cost gets passed on to consumers. However, the GDP deflator measures the change in prices of all goods and services produced domestically and excludes the prices of imports. Therefore, an increase in the price of imported forklifts from Belgium will not affect the GDP deflator.

Additional context from economic principles explains the foreign price effect, which indicates that if prices rise domestically while remaining fixed in other countries, domestic goods become more expensive relative to foreign goods. This could potentially reduce exports and increase imports. However, this effect is not directly related to the measurement of the CPI or the GDP deflator but rather affects net export expenditures.

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