inflation MCQ 3

Questions and Answers

To prioritize the prices of essential goods over non-essential goods

To ensure all items have equal importance

To adjust for seasonal fluctuations in prices

To reflect the percentage of income the average consumer spends on a particular good or service (correct)

It only measures prices in urban areas

It measures inflation accurately for all households

It is based on an average pattern of spending that may not reflect individual households (correct)

It only measures prices of essential goods

To make decisions on monetary policy

To determine the minimum wage

To increase taxes on labour to dampen demand (correct)

To adjust social welfare payments

615 Signup and view all the answers

Because the weight of fuel is higher in the CPI basket Signup and view all the answers

To support requests for pay rises Signup and view all the answers

To maintain an inflation rate of 2% over the medium term Signup and view all the answers

A healthy economy Signup and view all the answers

Economic growth Signup and view all the answers

The purchasing power of the euro Signup and view all the answers

2% over the medium term Signup and view all the answers

Study Notes

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.

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.

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.

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.