Question

1. Which of the following statements is (are) correct?
(x) The term “inflation” is used to describe a situation in which the overall level of prices in the economy is increasing and deflation occurs if the price level is decreasing.
(y) The inflation rate is calculated as the percentage change in the price level from the previous period.
(z) If inflation occurs, the typical household will spend more dollars to maintain the same standard of living.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (x) only

2. Which of the following statements about the CPI is (are) correct?
(x) The CPI is calculated monthly by the Bureau of Labor Statistics and the BLS includes thousands of goods and services in the basket that forms the basis for the consumer price index.
(y) In the consumer price index (CPI), goods and services are weighted according to how much consumers buy of each item.
(z) For any given year, the CPI is the price of the basket of goods and services in the given year divided by the price of the basket in the base year, then multiplied by 100.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (y) only

3. Which of the following statements is (are) correct?
(x) Each good and service in the CPI market basket is weighted according to its price
(y) The CPI is more commonly used as a gauge of inflation than the GDP deflator because the CPI better reflects the goods and services bought by consumers.
(z) The consumer price index (CPI) will be more influenced by a 5 percent increase in the price of housing than a 5 percent increase in the price of food and beverages because housing is a bigger part of the market basket than food and beverages.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (y) only

Answer 1

QUESTION 1

Answer: X, Y and Z

Inflation is the increase in general price level which reduces the purchasing power of the people. If the price level decreases it will cause deflation in the economy. The inflation is calculated as the percentage change in the price level or price index for a particular period compared to the previous period. When inflation takes place in an economy, people will have to spend more if they want to maintain same level of living because due to inflation the value of money will decline and the purchasing power will decrease. So more dollars must be spend.