CPI POST TEST REVIEW COMPREHENSIVE
QUESTIONS AND SOLUTIONS
◉ What is the purpose of the Consumer Price Index (CPI)?
Answer: To measure the overall cost of the goods and services
bought by a typical consumer.
◉ How is the CPI used in relation to the cost of living?
Answer: It monitors changes in the cost of living over time.
◉ What happens when the CPI rises?
Answer: The typical family has to spend more money to maintain
the same standard of living.
◉ What does the term inflation refer to?
Answer: A situation in which the economy's overall price level is
rising.
◉ How is the inflation rate calculated?
Answer: It is the percentage change in the price level from the
previous period.
,◉ What is the significance of the inflation rate reported in the
news?
Answer: It is calculated from the CPI and reflects the goods and
services bought by consumers.
◉ Who computes and reports the CPI?
Answer: The Bureau of Labor Statistics (BLS), part of the
Department of Labor.
◉ What does the BLS include when constructing the CPI?
Answer: All the goods and services that the typical consumer
buys.
◉ What is the largest category in the CPI's basket of goods and
services?
Answer: Housing, which makes up 42 percent of the typical
consumer's budget.
◉ What percentage of the typical consumer's budget is allocated
to transportation?
Answer: 16 percent.
◉ What is the core CPI?
Answer: The CPI for all goods and services excluding food and
energy.
, ◉ Why is the core CPI considered more stable?
Answer: Because food and energy prices show substantial short-
run volatility.
◉ What is the producer price index (PPI)?
Answer: An index that measures the cost of a basket of goods and
services bought by firms rather than consumers.
◉ What are the five steps the BLS follows to calculate the CPI?
Answer: 1. Fix the basket 2. Find the prices 3. Compute the cost of
the basket 4. Choose a base year and compute the index 5.
Compute the inflation rate.
◉ What is the first step in calculating the CPI?
Answer: Fix the basket by determining which prices are most
important to the typical consumer.
◉ How does the BLS determine the weights for goods in the CPI?
Answer: By surveying consumers to find the basket of goods and
services bought by the typical consumer.
◉ What is the formula for calculating the CPI?
Answer: CPI = (Price of basket in current year / Price of basket in
base year) * 100.
QUESTIONS AND SOLUTIONS
◉ What is the purpose of the Consumer Price Index (CPI)?
Answer: To measure the overall cost of the goods and services
bought by a typical consumer.
◉ How is the CPI used in relation to the cost of living?
Answer: It monitors changes in the cost of living over time.
◉ What happens when the CPI rises?
Answer: The typical family has to spend more money to maintain
the same standard of living.
◉ What does the term inflation refer to?
Answer: A situation in which the economy's overall price level is
rising.
◉ How is the inflation rate calculated?
Answer: It is the percentage change in the price level from the
previous period.
,◉ What is the significance of the inflation rate reported in the
news?
Answer: It is calculated from the CPI and reflects the goods and
services bought by consumers.
◉ Who computes and reports the CPI?
Answer: The Bureau of Labor Statistics (BLS), part of the
Department of Labor.
◉ What does the BLS include when constructing the CPI?
Answer: All the goods and services that the typical consumer
buys.
◉ What is the largest category in the CPI's basket of goods and
services?
Answer: Housing, which makes up 42 percent of the typical
consumer's budget.
◉ What percentage of the typical consumer's budget is allocated
to transportation?
Answer: 16 percent.
◉ What is the core CPI?
Answer: The CPI for all goods and services excluding food and
energy.
, ◉ Why is the core CPI considered more stable?
Answer: Because food and energy prices show substantial short-
run volatility.
◉ What is the producer price index (PPI)?
Answer: An index that measures the cost of a basket of goods and
services bought by firms rather than consumers.
◉ What are the five steps the BLS follows to calculate the CPI?
Answer: 1. Fix the basket 2. Find the prices 3. Compute the cost of
the basket 4. Choose a base year and compute the index 5.
Compute the inflation rate.
◉ What is the first step in calculating the CPI?
Answer: Fix the basket by determining which prices are most
important to the typical consumer.
◉ How does the BLS determine the weights for goods in the CPI?
Answer: By surveying consumers to find the basket of goods and
services bought by the typical consumer.
◉ What is the formula for calculating the CPI?
Answer: CPI = (Price of basket in current year / Price of basket in
base year) * 100.
