Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It helps identify if prices are rising or falling, guiding adjustments to interest rates.
B
It solely reflects the average income of consumers, which has no impact on inflation policies.
C
It measures only the prices of essential goods, making it unreliable for economic decisions.
D
It indicates consumer preferences, which directly dictate government spending.
Understanding the Answer
Let's break down why this is correct
Answer
The Consumer Price Index (CPI) measures how much prices for everyday goods and services change over time, which helps policymakers understand inflation. When the CPI shows that prices are rising quickly, it indicates that inflation is increasing, and this can lead to higher costs for families and businesses. Policymakers, like those in charge of the economy, use this information to decide whether to raise or lower interest rates. For example, if the CPI indicates high inflation, they might raise interest rates to make borrowing more expensive, hoping to cool down spending. This decision-making process is important because it helps maintain a stable economy and keeps prices manageable for everyone.
Detailed Explanation
The CPI shows how prices change over time. Other options are incorrect because This answer suggests that CPI only measures income; This option claims CPI only looks at essential goods.
Key Concepts
Consumer Price Index (CPI)
Inflation and monetary policy
Economic health indicators
Topic
Understanding Consumer Price Index
Difficulty
medium level question
Cognitive Level
understand
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