PRC-2 · Chapter 9 · Question 7 of 60
How is the 'purchasing power of money' mathematically related to a general price index like the Consumer Price Index (CPI)?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) It is inversely proportional to the price index.
Explanation
As general prices go up (inflation indicated by a higher index), the actual volume of goods a unit of currency can buy decreases. Therefore, purchasing power is inversely proportional to the price index.
More Indices MCQs
- Q9When constructing an index using the 'Simple Aggregate Method', what is a major structural flaw?
- Q10Which specific statistical index tracks the cost of a fixed basket of goods and services typically purchased by an average household?
- Q11In standard index construction, why do economists occasionally perform a process known as 'base shifting'?
- Q12What does a Quantity Index measure?
- Q13If the Laspeyres index for a dataset is 120 and the Paasche index is 125, what is the approximate Fisher's Ideal Index?