AP Macroeconomics Flashcards: Price Indices and Inflation
Written by AP Content Team, Verified for 2026 AP Exams, Last updated: May 2026
Review key ideas with interactive flashcards. This set includes 14 cards to help you master important concepts.
Define the Consumer Price Index (CPI).
The CPI measures the change in income a consumer needs to maintain the same standard of living. It is calculated based on the cost of a fixed basket of goods and services in a given year relative to a base year.
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Define the Consumer Price Index (CPI).
The CPI measures the change in income a consumer needs to maintain the same standard of living. It is calculated based on the cost of a fixed basket of goods and services in a given year relative to a base year.
What are real variables?
Real variables are nominal variables that have been adjusted for inflation. They are calculated by deflating the nominal variable by the price level.
If the CPI increases from 200 to 210 in one year, what is the inflation rate?
The inflation rate is 5%. This is calculated as the percentage change: [(210 - 200) / 200] * 100.
If the cost of a market basket is $400 in the base year and $440 in Year X, what is the CPI for Year X?
The CPI for Year X is 110. This is calculated as (Cost of basket in Year X / Cost of basket in base year) * 100, or ($440/$400) * 100.
Why does the CPI's use of a 'fixed basket of goods' present a problem?
Using a fixed basket causes substitution bias; it fails to capture how consumers change their spending patterns by substituting cheaper goods for more expensive ones, thus overstating inflation.
What is a major shortcoming of the CPI as a measure of inflation?
A key shortcoming of the CPI is substitution bias, which causes it to overstate the true inflation rate because it doesn't account for consumers switching to cheaper goods.
How is the inflation rate calculated using a price index?
The inflation rate is determined by calculating the percentage change in a price index, such as the CPI, between two time periods.
Differentiate between deflation and disinflation.
Deflation is a decrease in the overall price level (a negative inflation rate), while disinflation is a slowing of the rate of inflation.
What is inflation?
Inflation is the rate of increase in a price index, representing a rise in the overall price level in an economy.
A worker's nominal wage is $50,000 and the CPI is 125. What is the worker's real wage in base year dollars?
The worker's real wage is $40,000. This is calculated by deflating the nominal wage by the price level: ($50,000 / 125) * 100.
How can price indices be used to compare nominal variables over time?
Price indices are used to convert nominal variables into real variables, which removes the effect of inflation and allows for an accurate comparison of purchasing power across different time periods.
If your nominal income rises by 4% and the inflation rate is 6%, what is the change in your real income?
Your real income has decreased by approximately 2%. The change in a real variable is the change in the nominal variable minus the inflation rate.
Define the inflation rate.
The inflation rate is the percentage change in a price index, such as the CPI, from one period to another.
What fundamental economic idea does substitution bias relate to?
Substitution bias relates to the law of demand. As the price of a good in the fixed basket rises, consumers buy less of it and more of a substitute, a behavior the CPI does not capture.