Which statement about the GDP deflator is true?

• A. It measures prices of a fixed basket of consumer goods.
• B. It measures prices of imports only.
• C. It measures prices of all final goods and services produced domestically, and can change with the composition of output.
• D. It excludes government services.

Answer: (C)

The GDP deflator captures the overall price level of all final goods and services produced domestically, and it can move when the economy shifts what it produces. Unlike a fixed-basket measure, it changes as the mix of output changes, since prices of different final goods and services can vary and the composition of GDP can shift over time. It includes government services and investment goods as well as consumer goods, and it excludes imports because GDP counts only domestic production. So the statement that the deflator measures prices of all final goods and services produced domestically and can change with the composition of output is the correct description. The other options describe a fixed basket (not the GDP deflator), focus only on imports (not correct), or imply government services are excluded (also not correct).