Which scenario affects the CPI but not the GDP deflator?

The scenario involving Volvo raising the prices of cars sold in the U.S. affects the Consumer Price Index (CPI) but not the GDP deflator because the CPI measures the price changes in a fixed basket of goods and services that consumers purchase, which includes imports like foreign-made cars. When Volvo increases the price of its cars sold in the U.S., this directly affects the cost of that imported good, leading to an increase in the CPI, as it reflects the prices that consumers encounter.

On the other hand, the GDP deflator gauges the price changes of all domestically produced goods and services, only including those produced within a country’s borders. Since the Volvo cars are considered imports, their price change does not factor into the GDP deflator.

This distinction illustrates how the CPI tracks consumer prices more broadly, including those of imported goods, while the GDP deflator remains focused solely on prices of domestically produced items.