Which of the following is most likely to cause an increase in the Consumer Price Index (CPI)?

• A. A rise in the general level of consumer goods prices
• B. A reduction in government spending
• C. An increase in the unemployment rate
• D. A decrease in the cost of imported raw materials

Answer: (A)

Verified step by step guidance

1. Step 1: Understand what the Consumer Price Index (CPI) measures. The CPI tracks the average change over time in the prices paid by consumers for a market basket of consumer goods and services.
2. Step 2: Identify factors that directly affect the prices of consumer goods and services. An increase in the general level of consumer goods prices means that the prices of items in the CPI basket are rising, which would increase the CPI.
3. Step 3: Analyze the other options to see if they would increase the CPI. A reduction in government spending typically affects aggregate demand but does not directly increase consumer prices; it may even reduce inflationary pressure.
4. Step 4: Consider the impact of an increase in the unemployment rate. Higher unemployment usually reduces consumer spending and demand, which tends to lower or stabilize prices rather than increase them.
5. Step 5: Evaluate the effect of a decrease in the cost of imported raw materials. Lower input costs can reduce production costs, potentially lowering consumer prices and thus decreasing the CPI.