Suppose that the CPI does indeed overstate the rate of inflation. When the CPI increases by 5% and household incomes increase by 5%, we should conclude that the real incomes of households has:
A) increased.
B) stayed constant.
C) decreased.
D) increased more slowly than has inflation.

Question

Quizplus · Accepted Answer

If the CPI overstates the rate of inflation, then the actual rate of inflation is lower than the reported rate. This means that when the CPI increases by 5%, the actual increase in the cost of living is less than 5%. Therefore, if household incomes also increase by 5%, their real incomes have increased because they are able to afford more goods and services than before.

Suppose That the CPI Does Indeed Overstate the Rate of Inflation