Consumer Price Index (CPI) Calculation

The Consumer Price Index (CPI) Calculation

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Question

The consumer price index (CPI) is calculated

Answers

A. using a fixed basket of goods and will tend to understate inflation.

B. using a constantly changing basket of goods and will tend to understate inflation.

C. using a constantly changing basket of goods and will tend to overstate inflation.

D. using a fixed basket of goods and will tend to overstate inflation.

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Explanations

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A. B. C. D.

The consumer price index is calculated using a market basket based on the Consumer Expenditure Survey of urban consumers. There are 364 items in the market basket. The CPI compares the price of the fixed market basket in the base year with the price of the fixed market basket in the current year to determine how prices have changed over time.

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