Question 1

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

Accepted Answer

The answer of Several studies in the 1990s concluded that...

Question 2

Suppose lawn mowers are part of the market basket used to compute the CPI.Suppose also that the quality of lawn mowers improves while the price of lawn mowers stays the same.If the Bureau of Labor Statistics is able to precisely adjust the CPI for the improvement in quality,then,other things equal,

Accepted Answer

If the quality of lawn mowers improves while their price remains the same, and the CPI is adjusted for this quality improvement, the effective price of lawn mowers is considered to have decreased, leading to a decrease in the CPI.

Question 3

When the quality of a good improves while its price remains the same,the purchasing power of the dollar

Accepted Answer

When the quality of a good improves while its price remains the same, the value you get for each dollar spent increases, meaning the purchasing power of the dollar increases. If the Consumer Price Index (CPI) does not adjust for this quality improvement, it may suggest that consumers are getting less for their money than they actually are, thus overstating the change in the cost of living.

Question 4

The CPI differs from the GDP deflator in that

Accepted Answer

The Consumer Price Index (CPI) includes the prices of goods and services, including those produced abroad, that are purchased by consumers, whereas the GDP deflator measures the prices of all domestically produced goods and services in the economy, regardless of whether they are consumed by individuals, the government, or foreigners. Thus, increases in the prices of foreign-produced goods that are sold to U.S. consumers affect the CPI but not the GDP deflator.

Question 5

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 many economists agree that there is some degree of bias in the CPI as a measure of the cost of living, there is still debate among economists about the severity of this bias and what measures should be taken to address it. Therefore, option D is the most accurate statement.

Question 6

If the quality of a good deteriorates while its price remains the same,then the value of a dollar

Accepted Answer

If the quality of a good deteriorates while its price remains the same, this means that the same amount of money can only buy a lower quality product. As a result, the value of a dollar falls, meaning that it can purchase less than it could before. This leads to an increase in the cost of living, as it becomes more expensive to maintain the same standard of living with a lower purchasing power.

Question 7

Which of these events would cause the consumer price index to overstate the increase in the cost of living?

Accepted Answer

The answer of Which of these events would cause the...

Question 8

Two alternative measures of the overall level of prices are

Accepted Answer

The GDP deflator and the consumer price index are two alternative measures of the overall level of prices. The GDP deflator measures the changes in prices of all goods and services produced in an economy, whereas the consumer price index measures the changes in prices of goods and services consumed by households. Both measures are important to understand the overall level of inflation in an economy. The inflation rate and the GDP deflator are also closely related, as the inflation rate is the percentage change in the general level of prices as measured by the GDP deflator. However, the choice of the consumer price index and the GDP deflator as the two alternative measures of the overall level of prices is preferable, as it captures the different aspects of inflation that affect different segments of the economy.

Question 9

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 10

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 problems in the construction of the CPI does this situation represent?

Accepted Answer

The answer of Suppose OPEC succeeds in raising world oil...

Question 11

One of the widely acknowledged problems with using the consumer price index as a measure of the cost of living is that the CPI

Accepted Answer

The answer of One of the widely acknowledged problems with...

Question 12

Laura bought word-processing software in 2005 for $50.Laura's twin brother,Laurence,bought an upgrade of the same software in 2006 for $50.To which problem in the construction of the CPI is this situation most relevant?

Accepted Answer

This situation is most relevant to unmeasured quality change because the upgrade Laurence bought likely had improvements or additional features compared to the original software Laura bought, yet both are priced the same. This can lead to inaccuracies in measuring the true cost of living if the quality improvements are not accounted for in the CPI.

Question 13

For some racquet sports,there have been increases in the size of the racquets;also,the methods and materials used for making racquets have improved.To which problem in the construction of the CPI is this situation most relevant?

Accepted Answer

The situation described is most relevant to unmeasured quality change, as the improvements in racquet technology and materials have led to a change in the quality of the product, which is not fully captured by traditional price indexes such as the CPI. This can lead to an underestimation of the rate of inflation and potentially skew economic analyses and policy decisions.

Question 14

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 Bureau of Labor Statistics has made efforts to adjust for the substitution bias and new product bias, leading to a more accurate measure of inflation. However, there are still concerns about the accuracy of the CPI due to the inability to fully capture the impact of quality change and product innovation.

Question 15

The GDP deflator reflects the

Accepted Answer

The GDP deflator measures the level of prices of all goods and services produced in an economy, relative to the prices in a base year. Therefore, it reflects the current level of prices relative to the level of prices in the base year.

Question 16

The GDP Deflator reflects

Accepted Answer

The GDP Deflator reflects the prices of all final goods and services currently produced domestically, while the CPI reflects the price of a fixed basket of goods and services purchased by a typical consumer.

Question 17

When the quality of a good deteriorates while its price remains the same,the purchasing power of the dollar

Accepted Answer

If the quality of a good deteriorates while its price remains the same, the purchasing power of a dollar decreases. This means that the same amount of dollars can buy less in terms of quality. As a result, the CPI will tend to understate the change in the cost of living if the quality change is not accounted for, as it only accounts for changes in the prices of goods and not the quality.

Question 18

The problems with using the consumer price index as a measure 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. Therefore, if there are problems with using the CPI as a measure of the cost of living, it can have significant consequences for those who rely on these programs. Choices A, B, and D are also valid reasons why the problems with using the CPI are important, but do not have as direct of an impact on government programs as choice C does.

Question 19

Which of the following is the most accurate statement about the effects of quality change on the CPI?

Accepted Answer

The answer of Which of the following is the most...

Question 20

The CPI and the GDP deflator

Accepted Answer

The CPI and the GDP deflator generally move together, as they both measure changes in the overall price level. However, they may show different patterns of movement in specific time periods or circumstances due to differences in their calculation methodologies.

Quiz 24: Measuring the Cost of Living