Suppose that the CPI does indeed overstate the rate of inflation. When the CPI increases by 5%
and household incomes increase by 5%, we should conclude that the real incomes of
households:
A. increased.
B. stayed constant.
C. decreased.
D. increased more slowly than inflation.

If the CPI overstates the inflation rate, it means that the CPI is higher than the inflation rate. If the CPI = 5%, then the inflation rate must be lower than 5%. If the household incomes increased by 5%, then the real income (nominal income discounted by inflation rate) should have increased.

For example, the inflation rate is lower than 5%, so lets say it is 4%. Then the real income increased by: 5% / 4% = 1.25% - 1% = 0.25%

Suppose that the CPI does indeed overstate the rate of inflation. When the CPI increases by 5% and household incomes increase by 5%, we should conclude that the real incomes of households: A. increased. B. stayed constant. C. decreased. D. increased more slowly than inflation.

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Suppose that the CPI does indeed overstate the rate of inflation. When the CPI increases by 5%
and household incomes increase by 5%, we should conclude that the real incomes of
households:
A. increased.
B. stayed constant.
C. decreased.
D. increased more slowly than inflation.