Question 1

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

This situation is most relevant to unmeasured quality change because the improvements in size and materials of racquets are not reflected in the price index, leading to an overstatement of inflation. This is an example of quality improvement bias or the "hedonic pricing problem" in which the value of a good or service changes due to changes in quality and features, and not just price.

Question 2

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 3

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, then the purchasing power of a dollar falls. This means that the cost of living increases as people will need to spend more dollars to purchase the same quantity and quality of goods as before.

Question 4

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 5

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

Accepted Answer

If the quality of a good improves while its price remains the same, then the consumer is getting more value for their dollar. This means that the value of a dollar has increased, making it worth more in purchasing power. As a result, the cost of living decreases, as the consumer can purchase more goods and services with their dollar.

Question 6

Michelle bought word-processing software in 2009 for $75. Michelle's cousin, Barry, bought an upgrade of the same software in 2010 for $75. To which problem in the construction of the CPI is this situation most relevant?

Accepted Answer

This situation is most relevant to the problem of unmeasured quality change, as the software being purchased is an upgraded version of the same product. This means that the newer version likely has improvements in quality that are not accounted for in the CPI.

Question 7

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 situation represents the problem of substitution bias because consumers are switching to a new and cheaper source of fuel, which is not being captured by the CPI basket. It also represents the introduction of new goods because the hydrogen-powered engine is a new good that was not previously accounted for in the CPI basket.

Question 8

The problems with using the consumer price index as a measure of the cost of living are important because

Accepted Answer

Many government programs, such as Social Security benefits and income tax brackets, use the CPI to adjust for changes in the overall level of prices. Therefore, measurement problems with the CPI can have significant implications for these programs and the individuals who depend on them. The other options do not fully capture the importance of the CPI's measurement issues.

Question 9

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 10

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

There is still ongoing debate among economists about the severity and implications of the bias in the CPI, as well as what measures can be taken to address it. While some economists argue that the bias is a serious problem that needs to be corrected, others believe that the CPI accurately reflects the cost of living for most households. Ultimately, the debate continues, and there is no consensus among economists on the best course of action.

Question 11

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

Accepted Answer

Recent changes in the methods used to compute the CPI have reduced the upward bias in the CPI inflation rate. One major change was the use of chained CPI, which takes into account changes in consumer behavior as prices increase, resulting in a lower calculated inflation rate.

Question 12

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

Accepted Answer

The BLS makes adjustments for quality changes, but measuring quality is complex and can still lead to inaccuracies in the CPI.

Question 13

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 14

The CPI and the GDP deflator

Accepted Answer

The CPI and the GDP deflator generally move together because both measures the changes in the overall price level in the economy. However, they may show differences in patterns of movement due to differences in the goods and services included in the calculations and the weights assigned to them.

Question 15

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

Accepted Answer

When the quality of a good deteriorates while its price remains the same, the purchasing power of the dollar decreases. This means that a dollar now buys less than it used to, and therefore the CPI would understate the change in the cost of living if the quality change is not accounted for.

Question 16

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 17

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 18

The GDP deflator reflects the

Accepted Answer

The GDP deflator is a measure of the price level of all final goods and services included in GDP. It is calculated by dividing the nominal GDP (the current value of all goods and services produced) by the real GDP (the value of all goods and services produced adjusted for inflation using a base year). Therefore, the GDP deflator reflects the current level of prices relative to the level of prices in the base year.

Question 19

Suppose lawn mowers are part of the market basket used to compute the CPI. Suppose also that the quality of lawn mowers deteriorates 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

The answer of Suppose lawn mowers are part of the...

Question 20

Two alternative measures of the overall level of prices are

Accepted Answer

The GDP deflator (which measures the overall level of prices by dividing nominal GDP by real GDP and multiplying by 100) and the consumer price index (which measures changes in the prices of goods and services purchased by households) are both alternative measures of the overall level of prices. The inflation rate and GDP deflator are closely related, but the consumer price index provides an additional perspective on price changes that affect households specifically. Therefore, C is the best choice among the given options.

Quiz 11: Measuring the Cost of Living