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Understanding Consumer Price Index
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Which of the following scenarios best illustrates how the Consumer Price Index (CPI) can be impacted by changes in consumer behavior during economic fluctuations?

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Choose the Best Answer

A

A significant increase in the price of gasoline leading consumers to drive less, thereby reducing overall fuel consumption and affecting CPI.

B

A rise in wages across all sectors resulting in an automatic increase in the CPI without any changes in consumer habits.

C

An increase in the price of luxury items while basic necessities remain unchanged, causing a minimal impact on the overall CPI.

D

A government subsidy for essential goods that lowers their prices, which directly decreases the CPI without affecting consumer choices.

Understanding the Answer

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Answer

The Consumer Price Index (CPI) measures how prices of goods and services change over time, reflecting the cost of living for consumers. When the economy is doing well, people tend to spend more money, which can drive prices up because demand for products increases. For example, if many consumers decide to buy new cars at the same time, the high demand can lead to higher prices, thus impacting the CPI. Conversely, during economic downturns, if people start saving money and buying less, this can lower demand and potentially reduce prices, affecting the CPI in the opposite direction. So, changes in consumer spending habits directly influence the CPI by either increasing or decreasing demand for goods and services.

Detailed Explanation

When gas prices go up, people drive less. Other options are incorrect because Some might think that higher wages automatically raise the CPI; It's a common belief that luxury items alone can change the CPI.

Key Concepts

Consumer Price Index (CPI)
Inflation and consumer behavior
Economic fluctuations
Topic

Understanding Consumer Price Index

Difficulty

hard level question

Cognitive Level

understand

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