Question

The government collects the data that forms the Consumer Price Index (CPI) in order to track what economic problem? A. growth B. inflation C. productivity D. unemployment

Short answer

B. inflation

Step-by-step solution

Understand the CPI

The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them.

Identify the Economic Problem

The main purpose of the CPI is to determine the changes in the cost of living. By analyzing the changes in prices of consumer goods and services over time, the CPI helps to identify periods of price inflation or deflation.

Connect CPI to Inflation

Inflation is an economic problem where there is a general increase in prices and fall in the purchasing value of money. Since the CPI tracks changes in prices over time, it is used to monitor and measure inflation rates.

Eliminate Other Options

Growth (A), productivity (C), and unemployment (D) are also economic terms, but they do not relate directly to the purpose of the CPI. The CPI is specifically designed to track price level changes indicative of inflation (B).

Conclusion

Based on the examination, the correct answer is B. The CPI is used to track inflation in the economy.

Key concepts

inflation

Inflation is a key economic concept that refers to the general increase in prices over time. This means that the purchasing power of your money decreases. For example, if inflation is high, the price of groceries, rent, and other everyday items will be more expensive compared to a previous period.

Inflation can be caused by several factors:

• Demand-Pull Inflation: This occurs when the demand for goods and services exceeds their supply.
• Cost-Push Inflation: Rising costs of production, such as wages and raw materials, can lead to higher prices.
• Built-In Inflation: This involves businesses raising prices to keep up with increased costs and paying higher wages to employees.

Understanding inflation is important because it affects your cost of living. If you receive a salary increase at a rate lower than the inflation rate, you effectively have less purchasing power.

economic indicators

Economic indicators are vital tools used to understand the state and direction of the economy. They provide important data that helps in making informed decisions, whether you're a policy maker, a business owner, or even a student.

Some common economic indicators include:

• Gross Domestic Product (GDP): Measures the total value of all goods and services produced over a specific time period within a country.
• Unemployment Rate: The percentage of the labor force that is unemployed and actively seeking work.
• Consumer Price Index (CPI): Tracks changes in the prices paid by consumers for a basket of goods and services.

Each of these indicators helps to provide a snapshot of economic health. For example, a rising GDP suggests economic growth, while a high unemployment rate may signal economic distress. The CPI, among these, is crucial for monitoring inflation and the overall cost of living.

cost of living

Cost of living refers to the amount of money needed to cover basic expenses such as housing, food, taxes, and healthcare in a certain place and time period. It is a key aspect tracked by the Consumer Price Index (CPI).

When the CPI shows an increase, it often means that the cost of living has gone up, making it more expensive to maintain a standard lifestyle. Various factors can contribute to changes in the cost of living, including:

• Housing Costs: Rent and home prices can significantly impact the cost of living.
• Food Prices: Changes in the cost of staple items like fruits, vegetables, and meat affect grocery bills.
• Healthcare Expenses: Costs associated with medical care and health insurance can also vary.

Understanding the cost of living is essential for budgeting and financial planning. It helps individuals and families to make informed decisions about where to live and how to allocate their resources. The CPI is a valuable tool in tracking these costs and helping you understand how they change over time.