What is the CPI based on?

• A. Based on the money supply.
• B. Based on the average price of a fixed basket of goods.
• C. Based on changes in unemployment.
• D. Based on consumer confidence.

Answer: (B)

It tracks how the overall price level changes by looking at the cost of a fixed basket of goods and services that households typically buy. The basket is fixed in composition, with weights that reflect how much households spend on each item. Prices for those items are gathered over time, and the total cost of the basket is compared to its cost in a base period. This comparison yields an index that rises when prices rise and falls when prices fall, showing inflation or deflation. It isn’t determined by the money supply, unemployment, or consumer confidence, which relate to different aspects of the economy.