Question

The consumer price index (CPI) can be used to measure inflation. There are potential problems with this process though that can result in inflation being overstated or understated. Place each statement according to whether it would cause inflation to be overstated, understated, or would give an accurate representation of inflation.
a. Pat, a confirmed chocoholic, notices that a favorite candy bar shrank in size, but its price stayed the same.
- _________________________________________
b. Sam loves bagels, but bagels are becoming more expensive. Sam replaces bagels with muffins in the breakfast routine because muffins remain relatively cheap.
- _________________________________________
c. Mary and Bob replace their old minivan with a new one. The new van costs 15% more than the old van, but the new model has many updated features like a camera to assist with backing up, GPS, and better fuel economy.
- _________________________________________
d. Chris is an avid runner, loyal to one particular brand of running shoe. She buys a new pair of the same shoe every few months. The price of the shoes has doubled in the last 15 years.
- __________________________________________

ANSWER CHOICES (can be used more than once)
- Causes inflation to be overstated
- Does not cause inflation to be overstated or understated
- Causes inflation to be understated

Answer 1

The decrease in the size of the candy bar would cause inflation to be understated.

The replacement of muffins with bagels would cause inflation to be overstated.

The new updated version of the van would cause inflation to be overstated.

The 15% increase in the price of running shoes would not cause inflation to be overstated or understated.

What is the consumer price index?

The consumer price index is an index used to measure the changes in the price of a basket of good over a period of time. Consumer price index measures inflation. Inflation is when the general price level in an economy increases.

CPI = (cost of basket of goods in current period / cost of basket of goods in base period) x 100

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