Question 1

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 value of a dollar increases. This means that the purchasing power of a dollar increases, and the cost of living decreases as people are able to buy more with their money.

Question 2

To which of the problems in the construction of the CPI is the creation of the mobile phone most relevant?

Accepted Answer

The creation of the mobile phone is most relevant to the introduction of new goods problem in the construction of the CPI. Mobile phones have become a more common and essential product in recent years, and their introduction to the market has caused changes in consumer behavior and spending patterns. This can cause difficulties in accurately measuring inflation and calculating changes in the cost of living, particularly in terms of substitution effects between different goods and services.

Question 3

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 4

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 5

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 the dollar decreases. This means that consumers are able to buy fewer goods with the same amount of money, which indicates an increase in the cost of living. If the CPI does not account for the decrease in purchasing power, it will underestimate the change in the cost of living, making option D the correct answer.

Question 6

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 7

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 decreases. This means that the value of a dollar falls and the cost of living increases. This is because consumers will have to spend more dollars to maintain the same level of consumption as before the decrease in quality.

Question 8

The introduction of a new good

Accepted Answer

Introducing a new good increases the options available for consumers, leading to increased competition and potentially lower prices for similar goods. This can ultimately lead to a decrease in the cost of maintaining the same level of economic well-being.

Question 9

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 Consumer Price Index (CPI) does not always effectively account for the introduction of new goods. When new products enter the market, they can offer more value or different options to consumers, which the CPI might not immediately or adequately reflect, thus not fully capturing changes in the cost of living or consumer preferences.

Question 10

To which of the problems in the construction of the CPI is the invention of pocket-sized computers most relevant?

Accepted Answer

The invention of pocket-sized computers is most relevant to the problem of "introduction of new goods." It is a new good that did not exist before, and it has become very popular in recent years. The CPI needs to account for the introduction of new goods because it shifts the consumer's basket of goods and affects the overall price level.

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, such as the substitution effect and the introduction of hedonic adjustments, have reduced the upward bias that was previously present in the CPI inflation rate.

Question 12

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 13

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 and tax brackets, use the CPI to adjust for changes in the overall level of prices. If the CPI is not an accurate measure of the cost of living, these programs may not be adjusting appropriately, leading to unintended consequences for beneficiaries or taxpayers. Additionally, the accuracy of the CPI affects economic policy decisions, as policymakers use inflation rates to set interest rates and make other important decisions.

Question 14

Because the CPI is based on a fixed basket of goods, the introduction of new goods and services in the economy causes the CPI to overestimate the cost of living. This is so because

Accepted Answer

The answer of Because the CPI is based on a...

Question 15

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 in the question is most relevant to the unmeasured quality change problem in the construction of the CPI. As the size of the racquets increases and new materials and methods are used, it affects the quality of the racquets, resulting in a change in their value to consumers. However, this change in value is not fully captured in CPI calculations, which may result in an underestimation of inflation.

Question 16

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 17

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 some agreement among economists that there is a bias in the CPI, there is still debate about the severity of the bias and what, if anything, should be done about it. Some economists argue for making changes to the index to address the bias, while others believe that the bias is not significant enough to warrant a change.

Question 18

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 19

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 20

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...

Quiz 24: Measuring the Cost of Living

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

To which of the problems in the construction of the CPI is the creation of the mobile phone most relevant?

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?

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

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

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

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

The introduction of a new good

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

To which of the problems in the construction of the CPI is the invention of pocket-sized computers most relevant?

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

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

Because the CPI is based on a fixed basket of goods, the introduction of new goods and services in the economy causes the CPI to overestimate the cost of living. This is so because

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?

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

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

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

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