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.

A) increased.

Explanation:

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%

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