Which of the following best describes the consumer price index?

• A. The total amount of goods and services produced in an economy during a specific period.
• B. A measure of the responsiveness of quantity demanded to changes in price.
• C. The difference between what consumers are willing to pay and what they actually pay for a good.
• D. A measure that tracks changes in the average price level of a basket of goods and services purchased by households over time.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the concept of the Consumer Price Index (CPI). The CPI is an economic indicator that measures the average change over time in the prices paid by consumers for a fixed basket of goods and services.
2. Step 2: Recognize that the CPI is used to track inflation by comparing the cost of this basket in different time periods, reflecting how the purchasing power of money changes.
3. Step 3: Differentiate the CPI from other economic concepts: it is not the total production in the economy (which relates to GDP), nor is it a measure of price elasticity (responsiveness of quantity demanded), nor is it consumer surplus (difference between willingness to pay and actual payment).
4. Step 4: Identify that the correct description of the CPI is that it tracks changes in the average price level of a basket of goods and services purchased by households over time.
5. Step 5: Conclude that the CPI serves as a key tool for policymakers and economists to understand inflation trends and cost of living adjustments.