1. Visit http://www.bls.gov/cpi/cpifaq.htm and answer the question: Whose buying habits does the CPI reflect?

Your students will find a great answer to this question. The information is repeated here for your convenience.

The CPI reflects spending patterns for each of two population groups: all urban consumers and urban wage earners and clerical workers. The all urban consumers group represents about 87 percent of the total U.S. population. It is based on the expenditures of almost all residents of urban or metropolitan areas, including professionals, the self-employed, the poor, the unemployed and retired persons as well as urban wage earners and clerical workers. Not included in the CPI are the spending patterns of persons living in rural nonmetropolitan areas, farm families, persons in the Armed Forces, and those in institutions, such as prisons and mental hospitals.

2. Discuss the difference between the CPI and the core CPI as a measure of inflation.

The Consumer Price Index (CPI) is a measure of the average price behavior for all goods and services in the economy. It is based on a "basket" of goods and services that are followed over time, normally a year. Since it is an indicator of the change in the general level of consumer prices or the rate of inflation, consumers can compare movements in the CPI to changes in their own personal income to evaluate their own financial position.

The core CPI, on the other hand eliminates volatile elements in the measure to create a better estimate of long-term price movements. Specifically, the core CPI takes out the volatile prices of food and energy to come up with an adjusted measure of inflation. Food and energy prices can spike upward or downward and give a false impression of what will happen over a longer period of time. The Federal Reserve uses this corrected measure in its monetary policy making decisions. They monitor the core rate and when it exceeds 2 percent they are likely to take an inflation fighting position with respect to monetary policy and increase the cost of borrowing.

Multiple Choice/True False Questions