Multiple Choice
In the context of the Consumer Price Index (CPI), what does the inflation rate indicate?
11. Unemployment and Inflation
Inflation and Consumer Price Index (CPI)
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Join thousands of students who trust us to help them ace their exams!Watch the first videoMultiple Choice
Typically, high inflation is a sign of which of the following macroeconomic conditions?
A
Real GDP is rising while the price level is constant, indicating no inflationary pressure.
B
The CPI must be decreasing because consumers can buy the same basket of goods for less.
C
The economy is experiencing deflation, meaning the general price level is falling over time.
D
The general price level is rising rapidly, often because aggregate demand is growing faster than aggregate supply.
Verified step by step guidance1
Step 1: Understand the concept of inflation. Inflation refers to a sustained increase in the general price level of goods and services in an economy over a period of time.
Step 2: Recognize that high inflation means prices are rising rapidly, which implies that the purchasing power of money is decreasing.
Step 3: Connect inflation to aggregate demand and aggregate supply. High inflation often occurs when aggregate demand (total spending in the economy) grows faster than aggregate supply (total production of goods and services).
Step 4: Analyze the incorrect options: if real GDP is rising but the price level is constant, there is no inflation; if the CPI is decreasing, that indicates deflation, not inflation; deflation means prices are falling, which is the opposite of inflation.
Step 5: Conclude that high inflation is typically a sign that the general price level is rising rapidly, often due to aggregate demand outpacing aggregate supply.
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Inflation and Consumer Price Index (CPI) practice set
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