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Consumer Price Index (CPI) quiz #1 Flashcards

Consumer Price Index (CPI) quiz #1
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  • What are the main factors that can cause changes in the Consumer Price Index (CPI)?
    The main factors that cause changes in the CPI are changes in the prices of goods and services within the typical basket purchased by households. These price changes can be driven by supply and demand shifts, production costs, and broader economic conditions, leading to inflation or deflation as measured by the CPI.
  • How does the government determine which goods to include in the CPI basket?
    The government surveys households to find out what goods and services they typically purchase, and uses this information to create the CPI basket.
  • What is the significance of the base year in CPI calculations?
    The base year serves as the reference point for CPI calculations, and its CPI is always set to 100.
  • How is the cost of the CPI basket calculated for a given year?
    The cost is calculated by multiplying the quantity of each item in the basket by its price in that year and summing the totals for all items.
  • What formula is used to calculate the CPI for a specific year?
    CPI is calculated as (Cost of basket in current year / Cost of basket in base year) × 100.
  • Why is the CPI in the base year always 100?
    Because the cost of the basket in the base year divided by itself equals 1, and multiplying by 100 gives 100.
  • How do you calculate the inflation rate using CPI values?
    The inflation rate is calculated as ((CPI in current year - CPI in previous year) / CPI in previous year) × 100.
  • Why is there no inflation rate calculated for the base year?
    There is no inflation rate for the base year because there is no previous year to compare it to.
  • What is the typical size of the household survey used to determine the CPI basket in the U.S.?
    The U.S. government surveys approximately 14,000 households to determine the CPI basket.
  • How does the complexity of the real-world CPI basket compare to classroom examples?
    The real-world CPI basket includes many categories and goods, making it much more complex than the simple examples with only a few products used in class.