CPI measures which economic phenomenon?

• A. Unemployment
• B. Trade balance
• C. Inflation
• D. Government deficits

Answer: (C)

CPI tracks the price level of a fixed basket of goods and services over time, which tells us about inflation. When the total cost of that basket rises, prices are higher across the economy, indicating inflation; when it falls, there’s deflation or disinflation. CPI isn't about how many people are unemployed (that's the job market) or about international trade balances (exports minus imports) or government deficits (fiscal balance). It’s specifically a price index used to measure changes in the cost of living, with the inflation rate shown by the percent change in CPI from one period to the next.