Multiple Choice
How does inflation typically affect consumers' purchasing power when nominal income does not increase at the same rate as prices?
11. Unemployment and Inflation
Inflation and Consumer Price Index (CPI)
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In the context of the Consumer Price Index (CPI), what does the inflation rate indicate?
A
The percentage change in real GDP over a given period
B
The current level of the CPI index number in a given month or year, regardless of past values
C
The percentage change in the overall price level (as measured by the CPI) over a given period, typically from one year to the next
D
The share of total consumer spending devoted to goods and services included in the CPI market basket
Verified step by step guidance1
Step 1: Understand that the Consumer Price Index (CPI) measures the average change over time in the prices paid by consumers for a market basket of goods and services.
Step 2: Recognize that the inflation rate is derived from the CPI and represents how much the overall price level changes between two periods, usually expressed as a percentage.
Step 3: Recall the formula for the inflation rate based on CPI values: \(\text{Inflation Rate} = \frac{\text{CPI}_{t} - \text{CPI}_{t-1}}{\text{CPI}_{t-1}} \times 100\) where \(\text{CPI}_{t}\) is the CPI in the current period and \(\text{CPI}_{t-1}\) is the CPI in the previous period.
Step 4: Understand that the inflation rate does not measure changes in real GDP, the absolute level of CPI, or the share of consumer spending, but specifically the percentage change in the overall price level as captured by the CPI.
Step 5: Conclude that the inflation rate indicates the percentage change in the overall price level (as measured by the CPI) over a given period, typically from one year to the next.
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Inflation and Consumer Price Index (CPI) practice set
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