Association of Chartered Certified Accountants (ACCA) Certification Practice Test

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What is the purpose of the Harmonised Index of Consumer Prices (HICP)?

To measure unemployment levels
To serve as a basis for the UK's inflation target
To assess global trade patterns
To evaluate national income levels

The correct answer is: To serve as a basis for the UK's inflation target

The Harmonised Index of Consumer Prices (HICP) serves as a crucial tool for measuring inflation across the European Union and is specifically utilized by the Bank of England as a basis for the UK's inflation target. The HICP provides a consistent and comparable measure of price changes, which allows policymakers to gauge the inflation rate effectively. This index ensures that monetary policy can be directed accurately in relation to the set inflation goal, helping maintain price stability within the economy. By adhering to a defined inflation target, central banks can foster economic predictability, encouraging investment and consumption. The other options relate to different economic metrics and objectives. Unemployment levels, global trade patterns, and national income evaluations are measured by other specific indices and economic studies, which do not focus directly on consumer price changes and inflation targeting as the HICP does. Thus, the HICP's primary purpose aligns directly with its utility in managing and setting inflation rates.