Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
A declining CPI indicates that nominal values are rising while real values are falling.
B
A stable CPI suggests that both nominal and real values are unaffected by deflation.
C
An increasing CPI reflects rising nominal values while real values decline during deflation.
D
A decreasing CPI indicates that nominal values are falling, leading to an increase in real values.
Understanding the Answer
Let's break down why this is correct
Answer
The Consumer Price Index (CPI) measures how prices of goods and services change over time, helping us understand inflation or deflation. When prices are falling, which is called deflation, the nominal value of money, or the amount you see on a price tag, can be higher than the real value, meaning what your money can actually buy increases. For example, if the nominal price of a loaf of bread is $2 but the CPI shows that prices have dropped, that loaf may now cost less in terms of what you can afford. Thus, in a deflationary context, the real value of money increases because you can buy more with the same amount of nominal dollars. Therefore, understanding the CPI helps us see how deflation affects purchasing power, showing that even though nominal prices might stay the same, they feel cheaper when adjusted for real value.
Detailed Explanation
When the CPI goes down, it means prices are falling. Other options are incorrect because This answer suggests that prices are rising, which is not true during deflation; A stable CPI means prices are not changing, not that they are unaffected by deflation.
Key Concepts
Consumer Price Index (CPI)
nominal vs. real value
deflation
Topic
Understanding Consumer Price Index
Difficulty
hard level question
Cognitive Level
understand
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