AP Macroeconomics Practice Quiz: Price Indices and Inflation
Written by AP Content Team, Verified for 2026 AP Exams, Last updated: May 2026
Test your understanding with short quizzes. This quiz has 16 questions to check your progress.
Question 1 of 16
All Questions (16)
A) A measure of the change in the price of producer goods and services.
B) A measure of the cost of a fixed basket of goods and services in a given year relative to a base year.
C) The total value of all final goods and services produced in an economy.
D) The percentage increase in nominal wages over a specific period.
Correct Answer: B
The provided content explicitly states that 'The CPI measures the cost of a fixed basket of goods and services in a given year relative to the base year.' Option A describes the PPI, which is excluded. Options C and D define GDP and nominal wage growth, respectively.
A) 80
B) 100
C) 125
D) 250
Correct Answer: C
The CPI is calculated as (Cost of basket in current year / Cost of basket in base year) * 100. In this case, it is ($250 / $200) * 100 = 1.25 * 100 = 125.
A) 5.7%
B) 6.0%
C) 9.0%
D) 159%
Correct Answer: B
The inflation rate is the percentage change in a price index. The formula is ((CPI Year 2 - CPI Year 1) / CPI Year 1) * 100. So, ((159 - 150) / 150) * 100 = (9 / 150) * 100 = 0.06 * 100 = 6.0%.
A) understate the true inflation rate because it ignores quality improvements.
B) overstate the true inflation rate because it does not account for consumers switching to cheaper goods.
C) accurately measure the inflation rate but fail to measure deflation.
D) understate the true inflation rate because the market basket is updated too frequently.
Correct Answer: B
The content states, 'The CPI as a measure of inflation has some shortcomings, such as substitution bias, causing it to overstate the true inflation rate.' Substitution bias occurs because the CPI uses a fixed basket and doesn't account for consumers substituting away from goods whose prices have risen.
A) a nominal variable multiplied by the price level.
B) a variable that has not been adjusted for inflation.
C) a nominal variable deflated by the price level.
D) the percentage change in a nominal variable.
Correct Answer: C
The content directly states that 'Real variables, such as real wages, are the nominal variables deflated by the price level.' This means the nominal value is adjusted for changes in the price level to reflect purchasing power.
A) increased.
B) decreased.
C) remained the same.
D) cannot be determined from the information given.
Correct Answer: C
The nominal wage increased by ($55,000 - $50,000) / $50,000 = 10%. The inflation rate was (121 - 110) / 110 = 10%. Since the nominal wage increased at the same rate as inflation, the real wage (purchasing power) remained the same.
A) Inflation
B) Deflation
C) Stagflation
D) Disinflation
Correct Answer: D
Disinflation is defined as a decrease in the rate of inflation. The price level is still rising (inflation is positive at 1%), but it is rising more slowly than before. Deflation would be a negative inflation rate.
A) By multiplying the nominal variable by the price index.
B) By converting nominal variables into real variables to remove the effects of inflation.
C) By calculating the average of the nominal variables over the time periods.
D) By assuming nominal and real variables are equal if the price index is above 100.
Correct Answer: B
The content explains that price indices are used to deflate nominal variables, turning them into real variables. This process removes the distortion of changing price levels, allowing for a meaningful comparison of purchasing power over time.
A) absolute level of the Consumer Price Index.
B) sum of the prices in the market basket.
C) percentage change in a price index.
D) difference between real and nominal GDP.
Correct Answer: C
The content explicitly states, 'The inflation rate is determined by calculating the percentage change in a price index, such as CPI or the GDP deflator.'
A) Because the quality of goods in the basket never changes.
B) Because a fixed basket does not account for consumers substituting cheaper goods for more expensive ones, thus overstating the cost of living.
C) Because a fixed basket includes taxes, which do not affect the standard of living.
D) Because the government frequently changes the items in the basket, making year-to-year comparisons invalid.
Correct Answer: B
The use of a fixed basket is the direct cause of substitution bias. When the price of one good rises, consumers often buy less of it and more of a substitute. A fixed basket assumes they keep buying the same amount of the more expensive good, which overstates the increase in the actual cost to maintain their standard of living.
A) Inflation
B) Deflation
C) Disinflation
D) Hyperinflation
Correct Answer: B
Deflation is defined as a decrease in the general price level, which corresponds to a negative inflation rate. This is distinct from disinflation, which is a slowing of the inflation rate.
A) $40,000
B) $50,000
C) $80,000
D) $128,000
Correct Answer: B
Real income is calculated by deflating the nominal income by the price level. The formula is (Nominal Income / CPI) * 100. So, ($80,000 / 160) * 100 = $500 * 100 = $50,000.
A) The amount of goods you can buy with your salary.
B) The wage you are paid in current dollars.
C) The unemployment rate adjusted for seasonal changes.
D) The interest rate after accounting for inflation.
Correct Answer: B
A nominal variable is one measured in current dollars, not adjusted for inflation. The wage you are paid is a nominal value. Options A and D describe real variables (real wage/purchasing power and real interest rate).
A) Nominal wages will appear to grow faster than they actually do.
B) The government will collect less tax revenue than expected.
C) Calculated real wages will appear to grow more slowly than they actually do.
D) The national debt will decrease automatically.
Correct Answer: C
Real wage is calculated by deflating the nominal wage by the CPI. If the CPI (the denominator) is overstated, the resulting real wage will be understated. This means the calculated growth in purchasing power will be lower than the actual growth.
A) serves as a benchmark for comparison.
B) has the highest recorded inflation.
C) experienced significant deflation.
D) is always the most recent year in the data set.
Correct Answer: A
The content states that the CPI measures the cost of a basket 'relative to the base year.' The base year is the reference point against which prices in other years are compared. The CPI for the base year is always 100.
A) Their purchasing power will decrease over time because the adjustment is too small.
B) Their purchasing power will likely increase over time because the inflation adjustment is larger than the true increase in the cost of living.
C) Their purchasing power will remain exactly constant because the CPI is an accurate measure of their cost of living.
D) The effect on their purchasing power cannot be determined because substitution bias is random.
Correct Answer: B
The content states that substitution bias causes the CPI to overstate the true inflation rate. If the pension adjustment is based on this overstated CPI, the retiree's income will increase by more than their actual cost of living has increased, thus leading to an increase in their real purchasing power.