Question 1

The GDP deflator reflects the

Accepted Answer

The GDP deflator is a measure of the price level of all final goods and services produced in an economy, and is calculated by dividing nominal GDP (measured in current year prices) by real GDP (measured in base year prices) and multiplying by 100. Therefore, the GDP deflator reflects the current level of prices relative to the level of prices in the base year.

Question 2

If the prices of Australian-made shoes imported into the United States increase,then,as a result,

Accepted Answer

The increase in prices of Australian-made shoes will only affect the consumer price index as it measures the prices of goods and services consumed by households. The GDP deflator, on the other hand, measures the prices of all goods and services produced in an economy, including those that are not consumed by households, so it may not be affected by the increase in prices of a single imported product.

Question 3

Which of the following statements best represents economists' beliefs about the bias in the CPI as a measure of the cost of living?

Accepted Answer

While there is general agreement among economists that there is some level of bias in the CPI as a measure of the cost of living, there is still debate on just how severe this bias is and what potential solutions could be implemented to address it. Therefore, choice D is the best representation of economists' beliefs about the CPI bias.

Question 4

Samantha goes to the grocery store to make her monthly purchase of ginger ale.As she enters the soft drink section,she notices that the price of ginger ale has increased 15 percent,so she decides to buy some peppermint tea instead.To which problem in the construction of the CPI is this situation most relevant?

Accepted Answer

Samantha's decision to switch to peppermint tea is an example of substitution bias, which occurs when consumers substitute cheaper goods for more expensive ones in response to price increases. This can cause the CPI to overestimate the true cost of living because it assumes that consumers always purchase the same basket of goods, regardless of price changes.

Question 5

The price of imported olives produced by a U.S.company operating in Spain increases.By itself,what effect will this price increase have on the GDP deflator and on the CPI?

Accepted Answer

The GDP deflator measures the overall price level of all goods and services produced domestically, while the CPI measures the overall price level of goods and services purchased by consumers. Since the imported olives are produced by a U.S. company operating in Spain, its price increase does not affect the domestic production of goods and services, and therefore does not affect the GDP deflator. However, since the olives are purchased by consumers, their price increase will be reflected in the CPI. Thus, the GDP deflator will be unaffected and the CPI will increase.

Question 6

Suppose that U.S.mining companies purchase German-made ore trucks at a reduced price.By itself,what effect will this purchase have on the GDP deflator and on the consumer price index?

Accepted Answer

The purchase of German-made ore trucks by U.S. mining companies does not affect the consumer price index (CPI) because it measures the price of goods and services purchased by households, not businesses. The GDP deflator is also unaffected because it measures the prices of domestically produced goods and services, and the trucks are imported.

Question 7

A German automobile company produces cars in the United States,with some of those cars being exported to other nations and some of them being sold within the United States.If the prices of these cars increase,then

Accepted Answer

The GDP deflator measures the price level of all goods and services produced in the United States, while the CPI measures the price level of a basket of goods and services purchased by consumers in the United States. If the prices of cars increase, then the GDP deflator will increase because cars are a part of GDP. The CPI will also increase because cars are a part of the basket of goods and services purchased by consumers.

Question 8

The measurement problems in the consumer price index as an indicator of the cost of living are important because

Accepted Answer

Many government programs use the CPI to adjust for changes in the overall level of prices, such as Social Security benefits and income tax brackets. If the CPI is inaccurate, it can lead to incorrect adjustments in these programs, causing harm to consumers and the economy.

Question 9

By itself,a reduction in the price of large tractors imported into the United States from Russia

Accepted Answer

A reduction in the price of large tractors imported from Russia does not directly affect the domestic economy and therefore does not impact the GDP deflator or the consumer price index. Therefore, both the GDP deflator and the consumer price index remain unchanged.

Question 10

An increase in the price of dairy products produced domestically will be reflected in

Accepted Answer

The answer of An increase in the price of dairy...

Question 11

Recent changes in methods used to compute the CPI have made the

Accepted Answer

Recent changes in methods used to compute the CPI have made the upward bias in the CPI inflation rate less severe than it used to be. The changes include improvements in the sampling of prices, the treatment of quality changes, and the inclusion of new products. These changes have reduced the amount by which the CPI overstates inflation.

Question 12

In the United States,if the price of imported oil rises so that the price of gasoline and heating oil rise the

Accepted Answer

The consumer price index reflects the changes in the prices of goods and services purchased by consumers, including gasoline and heating oil. Therefore, if the price of imported oil rises, the consumer price index is likely to rise more than the GDP deflator, which reflects changes in the prices of all goods and services produced in the economy, including those not purchased by consumers.

Question 13

If the price of American-made power tools increases,then

Accepted Answer

The consumer price index (CPI) measures the average change in prices over time for a basket of goods and services purchased by consumers. The GDP deflator measures the average change in prices over time for all goods and services produced in the economy. If the price of American-made power tools increases, then the CPI will increase because consumers will have to pay more for these goods. The GDP deflator will also increase because the production of American-made power tools is included in the calculation of GDP.

Question 14

An important difference between the GDP deflator and the consumer price index is that

Accepted Answer

The answer of An important difference between the GDP deflator...

Question 15

In general,if a consumer good is produced domestically and consumed domestically,a decrease in its price will have which of the following effects?

Accepted Answer

The answer of In general,if a consumer good is produced...

Question 16

Suppose OPEC succeeds in raising world oil prices by 300 percent.This price increase causes inventors to look at alternative sources of fuel for internal-combustion engines.A hydrogen-powered engine is developed which is cheaper to operate than gasoline engines.Which problem in the construction of the CPI does this situation represent?

Accepted Answer

The correct answer is A because the introduction of a new, cheaper alternative to gasoline engines (hydrogen-powered engines) represents both substitution bias and the introduction of new goods.

Question 17

The price of CD players increases dramatically,causing a 1 percent increase in the CPI.The price increase will most likely cause the GDP deflator to increase by

Accepted Answer

The answer of The price of CD players increases dramatically,causing...

Question 18

Most,but not all,athletic apparel sold in the United States is imported from other nations.If the price of athletic apparel increases,the GDP deflator will

Accepted Answer

The GDP deflator reflects the average price level of goods and services produced domestically, while the Consumer Price Index reflects the average price level of goods and services purchased by consumers. Since most athletic apparel is imported, an increase in its price would affect the CPI more than the GDP deflator, which includes only domestically produced goods. Therefore, the GDP deflator would increase less than the Consumer Price Index.

Question 19

Most studies in the 1990s concluded that the consumer price index overstated inflation by about

Accepted Answer

Most studies in the 1990s concluded that the CPI overstated inflation by about 1 percentage point. Since then, improvements in the CPI methodology have likely reduced this overstatement to less than 1 percentage point.

Question 20

An increase in the price of domestically-produced industrial robots will be reflected in

Accepted Answer

The GDP deflator includes prices of all domestically produced goods and services, while the consumer price index (CPI) includes only goods and services purchased by households. Industrial robots are not typically purchased by households, so their price change would affect the GDP deflator but not the CPI.

Quiz 24: Measuring the Cost of Living