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Correct Answer: consumer price index
the correct answer to the question regarding inflation and deflation is "consumer price index," abbreviated as cpi. the consumer price index is a crucial economic indicator used primarily to measure the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
cpi is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. items in this basket are selected based on what a typical consumer spends their money on, and they are weighted according to the importance of each item in the total expenditure of households. for instance, housing costs might be weighted more heavily than apparel due to the larger portion of income that consumers typically spend on housing.
the importance of cpi lies in its function as a tool for economic policy. it is commonly used to adjust the cost of living allowances, wages, and pensions for the effects of inflation. for instance, if cpi goes up by 2% over a year, it suggests that the cost of living has increased by 2%, and wages might need to be adjusted proportionally to maintain the purchasing power of consumers.
furthermore, changes in the cpi are used to assess the effectiveness of government economic policy. central banks, such as the federal reserve in the united states, often use cpi as a guide to make decisions about interest rates. if cpi is rising (indicating inflation), the central bank might increase interest rates to cool down spending and investment.
in summary, the consumer price index (cpi) is more than just a statistical measure—it is an essential tool for understanding economic health and making informed decisions in both public and private sectors. it helps in gauging inflation or deflation in the economy, thereby influencing a wide range of economic policies and personal financial decisions.
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