Question

The key difference between the CPI and PCE is that

		CPI measures prices of only consumption goods while PCE included intermediate goods
		the CPI is released monthly while the PCE is released quarterly
		the CPI is a fixed basket of goods while the PCE's coverage is not fixed
		the CPI includes food and energy prices while the PCE does not

1. Core PCE and Core CPI measures of inflation

   		leave out food and energy prices
   		focus on the most important types of consumer goods
   		are more volatile than their "headline" counterparts
   		none of the above

2. Macroeconomists find core measures of inflation informative because

   		they give information about all prices in the economy
   		they give information about inflation pressures arising from macroeconomic supply and demand forces
   		they are calculated more often than their "headline" counterparts
   		they determine cost of living for households

3. When making monetary policy decisions, the Federal Reserve's preferred measure of inflation tends to be based on which of the following:

   		PCE
   		CPI
   		GDP Deflator
   		Real GDP

Answer 1

(1) (C)

CPI uses a fixed consumption basket, but PCE composition is not fixed.

(2) (A)

Core price index excludes volatile item prices like food and energy.

(3) (B)

Core CPI provides data about inflation due to macroeconomic supply and demand forces.

(4) (1)

Fed measures PCE-based inflation which uses dynamic basket of consumption goods.