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15 May, 03:14

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:

A. increased.

B. stayed constant.

C. decreased.

D. increased more slowly than inflation.

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Answers (1)
  1. 15 May, 03:31
    0
    A) increased.

    Explanation:

    If the CPI overstates the inflation rate, it means that the CPI is higher than the inflation rate. If the CPI = 5%, then the inflation rate must be lower than 5%. If the household incomes increased by 5%, then the real income (nominal income discounted by inflation rate) should have increased.

    For example, the inflation rate is lower than 5%, so lets say it is 4%. Then the real income increased by: 5% / 4% = 1.25% - 1% = 0.25%
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