Question 1

The substitution bias in the consumer price index refers to the idea that consumers ________ the quantity of products they buy in response to price,and the CPI does not reflect this and ________ the cost of the market basket.

Accepted Answer

Substitution bias occurs because consumers alter their consumption in response to changes in relative prices, opting for cheaper alternatives when prices rise. The CPI, which is based on a fixed basket of goods, fails to account for this behavior and thus tends to overestimate the true cost of living by not reflecting the substitutions consumers make towards less expensive options.

Question 2

The increase in quality bias in the consumer price index refers to the idea that price increases in the CPI reflect pure inflation,but ________ quality increases.This causes the CPI to ________ the cost of the market basket.

Accepted Answer

The increase in quality bias in the consumer price index suggests that when prices increase, they may not only reflect pure inflation but also improvements in quality. However, the CPI does not adequately adjust for these quality improvements, leading it to overstate the actual cost of living by making it seem like consumers are paying more for the same level of goods and services, when in fact they are paying for higher quality.

Question 3

The CPI is also referred to as

Accepted Answer

The CPI, or consumer price index, is also known as the cost-of-living index. It measures the average change in prices that consumers pay for goods and services over time, and is often used as a measure of inflation. The GDP deflator (A) is a measure of the overall level of prices in an economy, not just consumer prices. The inflation-consumption index (B) is not a commonly used term. The producer price index (D) measures the average change in prices received by producers, not the prices paid by consumers.

Question 4

Monthly expenditures for a family of 4 in 2017 averaged $1,400.In 2018,the cost of the same purchases was $1,500.If 2017 is the base year,what was the CPI in 2018?

Accepted Answer

To calculate the CPI in 2018 we use the formula:
CPI in 2018 = (Cost of basket in 2018 / Cost of basket in base year) x 100
Cost of basket in 2018 = $1,500
Cost of basket in base year (2017) = $1,400
CPI in 2018 = (1500/1400) x 100 = 107.14
Rounding off to the nearest whole number gives CPI in 2018 as 107.

Question 5

The producer price index measures the prices that firms

Accepted Answer

The producer price index (PPI) measures the average change over time in the selling prices received by domestic producers for their goods and services. This includes the prices received at all stages of production, from the raw materials used to produce goods to the prices of finished products. The PPI does not include prices paid for imports or labor.

Question 6

The "new product bias" in the consumer price index refers to the idea that

Accepted Answer

The "new product bias" occurs because new products often decrease in price after their introduction, but the CPI may not be adjusted frequently enough to reflect these lower prices, leading to an overestimation of the cost to consumers.

Question 7

The consumer price index implicitly assumes that the demand curve for each good and service in the representative market basket is

Accepted Answer

The answer of The consumer price index implicitly assumes that...

Question 8

Which of the following would be a consequence of substitution bias in the CPI?

Accepted Answer

Substitution bias in the CPI occurs when consumers switch to cheaper alternatives as prices change, but the CPI does not fully account for this behavior. This can lead to an overestimation of the cost of living, causing businesses to overcompensate employees for inflation.

Question 9

Which of the following is the smallest portion of the market basket of goods that makes up the CPI?

Accepted Answer

The smallest portion of the market basket of goods that makes up the CPI is apparel, with a weight of only 3.05%. Housing has the largest weight at 42.56%, followed by transportation at 16.40%, and food and beverages at 14.73%.

Question 10

The broadest measure of the price level that includes all final goods and services is

Accepted Answer

The GDP deflator includes all final goods and services produced domestically, regardless of whether they are consumed by households or businesses. The consumer price index only measures the prices of goods and services purchased by households, while the producer price index and wholesale price index focus on prices at earlier stages of production.

Question 11

The most widely used measure of inflation is based on which of the following price indices?

Accepted Answer

The most widely used measure of inflation is based on the Consumer Price Index (CPI), which tracks the prices of goods and services purchased by households. It measures the changes in the cost of a basket of goods and services over time, providing a gauge of inflationary pressures for the average consumer. The producer price index (PPI) measures changes in the prices received by producers of goods, the GDP deflator measures changes in the prices of all goods and services produced in an economy, and the wholesale price index tracks changes in the prices paid for goods by retailers and other businesses. While these indices are also important measures of inflation, they are not as widely used as the CPI.

Question 12

The Bureau of Labor Statistics has taken several steps to reduce the bias in the consumer price index.Which of the following is not one of the steps taken to reduce the bias?

Accepted Answer

The Bureau of Labor Statistics does not incorporate substitutions by consumers when prices of specific products rise rapidly.

Question 13

Your grandfather tells you that he earned $7,000/year in his first job in 1961.You earn $35,000/year in your first job in 2018.You know that average prices have risen steadily since 1961.You earn

Accepted Answer

To accurately compare incomes over time, one must adjust for inflation to calculate real income. Although nominally you earn 5 times more than your grandfather ($35,000 vs. $7,000), when adjusting for the increase in average prices (inflation) over the years, the real income increase is less than 5 times. This is because the purchasing power of $7,000 in 1961 was significantly higher than the purchasing power of $35,000 in 2018.

Question 14

Table 9-8
 
-Refer to Table 9-8.Suppose that the data in the table above reflect the price levels in the economy.What is the inflation rate in between 2017 and 2018?

Accepted Answer

The answer of Table 9-8
 
-Refer to Table 9-8.Suppose that...

Question 15

Table 9-7
 
-Refer to Table 9-7.Suppose that the data in the table above reflect price levels in the economy.What is the inflation rate between 2017 and 2018?

Accepted Answer

The inflation rate is calculated using the formula: [(Price in the later year - Price in the earlier year) / Price in the earlier year] * 100. Without the specific data from Table 9-7, the correct answer cannot be determined directly from the provided information. However, based on the question's structure, assuming choice A (2.9%) is correct, it implies that this choice was calculated based on the data from the table.

Question 16

If we want to use a measure of inflation that foreshadows price changes before they affect prices at the retail level,we would base our measure of inflation on

Accepted Answer

The producer price index (PPI) measures the average change over time in the selling prices received by domestic producers for their output. As such, it measures price changes at the wholesale level, before they are passed on to consumers in the form of higher retail prices. Therefore, the PPI is a good indicator of future price changes and is commonly used by economists and policymakers to track inflationary pressures in the economy.

Question 17

Table 9-9
 
-Refer to Table 9-9.Suppose that the data in the table above reflect the price levels in the economy.Given that data,we can say that the cost of living rose by ________ between 2017 and 2018?

Accepted Answer

The answer of Table 9-9
 
-Refer to Table 9-9.Suppose that...

Question 18

If the CPI changes from 125 to 120 between 2017 and 2018,how did prices change between 2017 and 2018?

Accepted Answer

The answer of If the CPI changes from 125 to...

Question 19

Most economists believe that the biases in the consumer price index cause the CPI to overstate the true inflation rate by about

Accepted Answer

The consumer price index (CPI) is believed to overstate the true inflation rate due to factors like substitution bias, quality improvements, and new product introductions. Most economists estimate this overstatement to be about one-half to one percentage point.

Question 20

To reduce the bias in the consumer price index,the Bureau of Labor Statistics

Accepted Answer

The answer of To reduce the bias in the consumer...

Quiz 9: Unemployment and Inflation

The substitution bias in the consumer price index refers to the idea that consumers the quantity of products they buy in response to price,and the CPI does not reflect this and the cost of the market basket.

The increase in quality bias in the consumer price index refers to the idea that price increases in the CPI reflect pure inflation,but quality increases.This causes the CPI to the cost of the market basket.