inflation MCQ 3

What is the purpose of applying weights to spending of each category of item in the Consumer Price Index?

What is one of the limitations of the Consumer Price Index?

What is the main use of the Consumer Price Index for policymakers?

What is the number of representative items in the Consumer Price Index basket?

Why might a 1% increase in the price of fuel have a bigger impact on the CPI than a 100% increase in the price of chewing gum?

What is one of the uses of the Consumer Price Index for workers and their unions?

What is the primary goal of the European Central Bank in terms of inflation?

What is a low inflation rate indicative of?

What is inflation a side effect of?

What is the European Central Bank responsible for maintaining?

What is the Eurozone's target inflation rate, as defined by the ECB?

Measuring Inflation with the Consumer Price Index

A basket of 615 representative items with 51,000 prices is priced monthly in 84 locations to measure inflation.
Weights are applied to each category of item based on the percentage of income the average consumer spends on it, giving more importance to certain price increases.
For example, a 1% increase in fuel prices has a bigger impact on the CPI than a 100% increase in chewing gum prices.

Uses of the Consumer Price Index

The CPI is an indicator of an economy's performance and measures inflation.
Policymakers use the CPI to inform decisions, such as increasing taxes on labor to control high inflation.
The CPI is used by workers and unions to support requests for pay rises.
It is used by the government to adjust social welfare payments.
The CPI facilitates international comparisons of inflation rates.

Limitations of the Consumer Price Index

The CPI is based on an average pattern of spending, which may not reflect individual household spending habits.
The CPI does not distinguish between urban and rural dwellers, although the cost of living can vary significantly between these areas, such as rent prices in recent years.

Inflation and Price Stability

The European Central Bank (ECB) is responsible for maintaining the purchasing power of the euro.
The ECB defines price stability as an inflation rate of 2% over the medium term for the eurozone.
Inflation is a natural consequence of economic growth.
A low inflation rate is an indicator of a healthy economy.

Learn how the CSO measures inflation using a basket of goods and services, with weights applied to spending categories. Understand how price increases impact the CPI.