Australian Year 10 Economics Practice Test

Which statement best describes the CPI?

An index of the total price level in the economy. A measure of the money supply. An index of the price changes of the goods and services bought by producers. An index of the cost of all goods and services to a typical consumer.

Correct Answer:

An index of the cost of all goods and services to a typical consumer.

Explanation:

The CPI is a measure of how the prices of a typical set of goods and services bought by households change over time. It tracks the cost of living for consumers by looking at a representative basket of items and seeing how much that basket costs now versus in the past. This makes it the best description because it focuses on the price changes that directly affect households, reflecting consumer inflation. It’s not about the money supply, nor about prices producers pay, and it isn’t the entire economy’s price level (that would be described by other indices like a broader deflator). For example, if the CPI rises, the same basket costs more, meaning consumers need more income to maintain the same standard of living.

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