The Consumer Price Index (CPI) Is Calculated

question 31

Multiple Choice

The consumer price index (CPI) is calculated

• A) using a fixed basket of goods and, therefore, will tend to understate inflation.
• B) using a fixed basket of goods and, therefore, will tend to overstate inflation.
• C) using a constantly changing basket of goods and, therefore, will tend to understate inflation.
• D) using a constantly changing basket of goods and, therefore, will tend to overstate inflation.

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Definitions:

GDP Deflator

A means to evaluate the price levels of all recently produced, domestically sourced, final goods and services in an economy.

Real GDP

Gross Domestic Product adjusted for inflation, representing the value of all goods and services produced over a specific time period, measured in constant prices.

GDP Deflator

An economic metric that converts the nominal GDP to real GDP by adjusting for changes in price levels, allowing comparison across years.

Real GDP

Gross Domestic Product adjusted for inflation, measuring the value of goods and services produced by an economy in a given year at constant prices.