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Measuring Inflation - CPI

Description: This quiz aims to assess your understanding of the concepts related to measuring inflation using the Consumer Price Index (CPI).
Number of Questions: 15
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Tags: inflation cpi consumer price index economic indicators
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What is the primary purpose of the Consumer Price Index (CPI)?

  1. To measure the change in the prices of a fixed basket of goods and services over time.

  2. To determine the purchasing power of a currency.

  3. To calculate the cost of living for a specific population.

  4. To compare the prices of goods and services across different countries.

Show answer
Correct Option: A
Explanation:

The CPI is designed to measure the average change in prices of a basket of goods and services that are commonly purchased by households in a specific region or country.

Which of the following is NOT a component of the CPI basket?

  1. Food and beverages

  2. Housing

  3. Transportation

  4. Investments

Show answer
Correct Option: D
Explanation:

Investments are not included in the CPI basket because they are not considered to be final goods or services consumed by households.

How is the CPI calculated?

  1. By comparing the prices of a fixed basket of goods and services over time.

  2. By surveying households about their spending habits.

  3. By using a hedonic regression model to estimate the quality-adjusted prices of goods and services.

  4. By combining the results of all of the above methods.

Show answer
Correct Option: A
Explanation:

The CPI is calculated by comparing the prices of a fixed basket of goods and services over time. The basket is updated periodically to reflect changes in consumer spending patterns.

What is the base year for the CPI in India?

  1. 2012

  2. 2010

  3. 2006

  4. 2000

Show answer
Correct Option: A
Explanation:

The base year for the CPI in India is 2012, which means that the CPI is calculated by comparing the prices of goods and services in a fixed basket to their prices in 2012.

What is the formula for calculating the CPI?

  1. CPI = (Current Price of Basket / Base Year Price of Basket) * 100

  2. CPI = (Base Year Price of Basket / Current Price of Basket) * 100

  3. CPI = (Current Price of Basket - Base Year Price of Basket) / Base Year Price of Basket

  4. CPI = (Base Year Price of Basket - Current Price of Basket) / Base Year Price of Basket

Show answer
Correct Option: A
Explanation:

The formula for calculating the CPI is CPI = (Current Price of Basket / Base Year Price of Basket) * 100.

What is the difference between CPI and WPI?

  1. CPI measures the change in prices of goods and services consumed by households, while WPI measures the change in prices of goods produced by industries.

  2. CPI measures the change in prices of goods and services purchased by businesses, while WPI measures the change in prices of goods and services consumed by households.

  3. CPI measures the change in prices of goods and services purchased by the government, while WPI measures the change in prices of goods and services consumed by households.

  4. CPI measures the change in prices of goods and services purchased by foreigners, while WPI measures the change in prices of goods and services consumed by households.

Show answer
Correct Option: A
Explanation:

CPI measures the change in prices of goods and services consumed by households, while WPI measures the change in prices of goods produced by industries.

What is the relationship between inflation and CPI?

  1. Inflation is the rate of change in CPI.

  2. CPI is the rate of change in inflation.

  3. Inflation and CPI are not related.

  4. Inflation is the opposite of CPI.

Show answer
Correct Option: A
Explanation:

Inflation is the rate of change in CPI. A positive inflation rate indicates that prices are rising, while a negative inflation rate indicates that prices are falling.

What is the impact of inflation on the economy?

  1. Inflation can lead to an increase in the cost of living.

  2. Inflation can lead to a decrease in the purchasing power of money.

  3. Inflation can lead to an increase in interest rates.

  4. All of the above.

Show answer
Correct Option: D
Explanation:

Inflation can lead to an increase in the cost of living, a decrease in the purchasing power of money, and an increase in interest rates.

What are some of the factors that can contribute to inflation?

  1. Increase in demand for goods and services

  2. Increase in the cost of production

  3. Government policies

  4. All of the above

Show answer
Correct Option:
Explanation:

Inflation can be caused by an increase in demand for goods and services, an increase in the cost of production, government policies, or a combination of these factors.

How can inflation be controlled?

  1. By increasing the supply of goods and services

  2. By decreasing the demand for goods and services

  3. By implementing monetary policies

  4. By implementing fiscal policies

Show answer
Correct Option:
Explanation:

Inflation can be controlled by increasing the supply of goods and services, decreasing the demand for goods and services, implementing monetary policies, and implementing fiscal policies.

What is the difference between core inflation and headline inflation?

  1. Core inflation excludes food and energy prices, while headline inflation includes all prices.

  2. Core inflation includes food and energy prices, while headline inflation excludes all prices.

  3. Core inflation is the rate of change in the CPI, while headline inflation is the rate of change in the WPI.

  4. Core inflation is the rate of change in the PPI, while headline inflation is the rate of change in the CPI.

Show answer
Correct Option: A
Explanation:

Core inflation excludes food and energy prices, while headline inflation includes all prices. This is because food and energy prices are volatile and can fluctuate significantly in the short term, making it difficult to identify the underlying trend in inflation.

What is the target inflation rate for the Reserve Bank of India (RBI)?

  1. 2%

  2. 3%

  3. 4%

  4. 5%

Show answer
Correct Option: C
Explanation:

The target inflation rate for the Reserve Bank of India (RBI) is 4%.

What are some of the challenges associated with measuring inflation?

  1. The CPI basket may not accurately reflect consumer spending patterns.

  2. The quality of goods and services can change over time.

  3. The prices of goods and services can be difficult to measure accurately.

  4. All of the above.

Show answer
Correct Option: D
Explanation:

Some of the challenges associated with measuring inflation include the fact that the CPI basket may not accurately reflect consumer spending patterns, the quality of goods and services can change over time, and the prices of goods and services can be difficult to measure accurately.

How can inflation be used to make economic decisions?

  1. Inflation can be used to determine the appropriate level of interest rates.

  2. Inflation can be used to forecast future economic growth.

  3. Inflation can be used to make investment decisions.

  4. All of the above.

Show answer
Correct Option: D
Explanation:

Inflation can be used to make economic decisions such as determining the appropriate level of interest rates, forecasting future economic growth, and making investment decisions.

What are some of the limitations of using the CPI to measure inflation?

  1. The CPI basket may not accurately reflect consumer spending patterns.

  2. The quality of goods and services can change over time.

  3. The prices of goods and services can be difficult to measure accurately.

  4. All of the above.

Show answer
Correct Option: D
Explanation:

Some of the limitations of using the CPI to measure inflation include the fact that the CPI basket may not accurately reflect consumer spending patterns, the quality of goods and services can change over time, and the prices of goods and services can be difficult to measure accurately.

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