Question 1

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?
A)substitution bias and introduction of new goods
B)introduction of new goods and unmeasured quality change
C)substitution bias and unmeasured quality change
D)income bias and substitution bias

Accepted Answer

The situation represents substitution bias because people are switching to a cheaper alternative fuel source, and introduction of new goods because the hydrogen-powered engine is a new good that was not previously included in the CPI calculations.

Question 2

Which of these events would cause the consumer price index to overstate the increase in the cost of living?
A)Car makers benefit from a new technology that allows them to sell higher-quality cars to consumers with no increase in price.
B)Energy prices decrease, and consumers respond by buying more gas and electricity.
C)A new good is introduced that renders cellular telephones inferior and obsolete.
D)All of the above are correct.

Accepted Answer

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

Question 3

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?
A)substitution bias
B)introduction of new goods
C)unmeasured quality change
D)income bias

Accepted Answer

The situation described in the question relates to unmeasured quality change because the improvements in racquet size and materials affect the quality of the product. As a result, the true inflation rate may be higher than what is reflected in the CPI, which only measures changes in prices without accounting for changes in quality.

Question 4

To which of the problems in the construction of the CPI is the invention of pocket-sized computers most relevant?
A)substitution bias
B)introduction of new goods
C)unmeasured quality change
D)income bias

Accepted Answer

The invention of pocket-sized computers falls under the category of introduction of new goods, which refers to the problem of the CPI not accounting for the entry of new products in the market. The use of pocket-sized computers has become very popular in recent years and can be considered a new good. As the CPI does not reflect the impact of new goods, the introduction of pocket-sized computers is relevant to this particular issue.

Question 5

The GDP deflator reflects the
A)level of prices in the base year relative to the current level of prices.
B)current level of prices relative to the level of prices in the base year.
C)level of real output in the base year relative to the current level of real output.
D)current level of real output relative to the level of real output in the base year.

Accepted Answer

The GDP deflator is a measure of the price level of all new, domestically produced, final goods and services in an economy. As such, it reflects the current level of prices relative to the level of prices in the base year, which is usually set to 100. The GDP deflator is calculated by dividing nominal GDP by real GDP and multiplying by 100.

Question 6

One of the widely acknowledged problems with using the consumer price index as a measure of the cost of living is that the CPI
A)fails to measure all changes in the quality of goods.
B)displays a housing bias.
C)accounts for changes in prices of some goods, but prices of certain goods are assumed to remain constant.
D)All of the above are correct.

Accepted Answer

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

Question 7

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?
A)substitution bias
B)unmeasured quality change
C)introduction of new goods
D)income bias

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 8

Which of the following is the most accurate statement about the effects of quality change on the CPI?
A)Even though the BLS adjusts the prices of products in the CPI basket when the quality of the products changes, changes in quality are still a problem because quality is so hard to measure.
B)Because the BLS adjusts the prices of products in the CPI basket when the quality of the products changes, changes in quality are no longer a problem for the CPI.
C)The BLS does not adjust the CPI for quality changes.
D)Most economists believe that changes in the quality of goods included in the CPI basket do not bias the CPI as a measure of the cost of living.

Accepted Answer

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

Question 9

To which of the problems in the construction of the CPI is the creation of the mobile phone most relevant?
A)substitution bias
B)introduction of new goods
C)unmeasured quality change
D)income bias

Accepted Answer

The creation of the mobile phone is most relevant to the introduction of new goods problem in the construction of the CPI. When new goods are introduced into the market, they may have a different price compared to the goods they are replacing, which can affect the basket of goods used to calculate the CPI. The creation of mobile phones introduced a new good that did not exist before and was not previously included in the CPI. This created a challenge for CPI calculation, as it was necessary to add mobile phones to the basket of goods and to determine their relative importance.

Question 10

Two alternative measures of the overall level of prices are
A)the inflation rate and the consumer price index.
B)the inflation rate and the GDP deflator.
C)the GDP deflator and the consumer price index.
D)the cost of living index and nominal GDP.

Accepted Answer

The GDP deflator measures the level of prices for all goods and services produced domestically, while the consumer price index measures the level of prices for a typical household's basket of goods and services. Both provide alternative measures of the overall level of prices, but the GDP deflator is a more comprehensive measure as it includes all goods and services produced domestically.

Question 11

When the quality of a good improves while its price remains the same, the purchasing power of the dollar
A)increases, so the CPI overstates the change in the cost of living if the quality change is not accounted for.
B)increases, so the CPI understates the change in the cost of living if the quality change is not accounted for.
C)decreases, so the CPI overstates the change in the cost of living if the quality change is not accounted for.
D)decreases, so the CPI understates the change in the cost of living if the quality change is not accounted for.

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 12

Which of the following statements best represents economists' beliefs about the bias in the CPI as a measure of the cost of living?
A)Economists agree that the bias in the CPI is a very serious problem.
B)Economists agree that the bias in the CPI is not a serious problem.
C)Economists agree on the severity of the CPI bias, but there is still debate on what to do about it.
D)There is still debate among economists on the severity of the CPI bias and what to do about it.

Accepted Answer

Economists have different opinions on the severity of the CPI bias and what to do about it. While some economists consider the bias to be a serious problem, others argue that it is not significant enough to warrant corrective measures. There is ongoing debate among economists on the best ways to address the issue of CPI bias, which suggests that there is no consensus on the matter.

Question 13

The problems with using the consumer price index as a measure of the cost of living are important because
A)even the appearance of high rates of inflation cause voters to become disenchanted.
B)politicians have manipulated the measurement problems to their advantage.
C)many government programs use the CPI to adjust for changes in the overall level of prices.
D)if the price level is overstated, consumers will be taken advantage of by sellers of consumer goods.

Accepted Answer

Many government programs, including Social Security payment adjustments 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, it could lead to problems with these program adjustments. The other options are also important reasons why the problems with using the CPI are significant, but they do not directly impact government programs in the way that choice C does.

Question 14

If the quality of a good deteriorates while its price remains the same, then the value of a dollar
A)rises and the cost of living increases.
B)rises and the cost of living decreases.
C)falls and the cost of living increases.
D)falls and the cost of living decreases.

Accepted Answer

If the quality of a good deteriorates while its price remains the same, then the value of a dollar falls because the same amount of money can now only buy a lower quality product. This leads to an increase in the cost of living because people now have to spend more money to maintain the same standard of living.

Question 15

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
A)new goods and services are always of higher quality than existing goods and services.
B)new goods and services cost less than existing goods and services.
C)new goods and services cost more than existing goods and services.
D)when a new good is introduced, it gives consumers greater choice, thus reducing the amount they must spend to maintain their standard of living.

Accepted Answer

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

Question 16

Recent changes in methods used to compute the CPI have made the
A)upward bias in the CPI inflation rate more severe than it used to be.
B)upward bias in the CPI inflation rate less severe than it used to be.
C)downward bias in the CPI inflation rate more severe than it used to be.
D)downward bias in the CPI inflation rate less severe than it used to be.

Accepted Answer

Recent changes in the 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 (BLS) has made several improvements to the CPI calculation methodology in recent years, including the introduction of geometric mean price aggregation, improved medical care price measurement, and more frequent updates to the market basket of goods and services included in the index. These changes have helped to reduce the upward bias in the CPI caused by factors such as quality changes, substitution effects, and outlet substitution biases.

Question 17

If the quality of a good improves while its price remains the same, then the value of a dollar
A)rises and the cost of living increases.
B)rises and the cost of living decreases.
C)falls and the cost of living increases.
D)falls and the cost of living decreases.

Accepted Answer

When the quality of a good improves while its price remains the same, it means that there is an increase in the value or utility obtained from each dollar spent. This leads to an increase in the value of a dollar. As a result, the cost of living decreases because individuals are able to obtain more goods and services for the same amount of money.

Question 18

Several studies in the 1990s concluded that the consumer price index overstated inflation by about
A)3 percentage points per year, and that number of percentage points likely still applies now.
B)3 percentage points per year, but recent improvements to the CPI probably have reduced the overstatement of inflation to something less than 3 percentage points.
C)1 percentage point per year, and that number of percentage points likely still applies now.
D)1 percentage point per year, but recent improvements to the CPI probably have reduced the overstatement of inflation to something less than 1 percentage point

Accepted Answer

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

Question 19

When the quality of a good deteriorates while its price remains the same, the purchasing power of the dollar
A)increases, so the CPI overstates the change in the cost of living if the quality change is not accounted for.
B)increases, so the CPI understates the change in the cost of living if the quality change is not accounted for.
C)decreases, so the CPI overstates the change in the cost of living if the quality change is not accounted for.
D)decreases, so the CPI understates the change in the cost of living if the quality change is not accounted for.

Accepted Answer

If the quality of a good deteriorates while its price remains the same, the purchasing power of the dollar decreases because consumers are getting less value for their money. This means that the CPI (Consumer Price Index), which measures the cost of living, will understate the actual change in the cost of living if it doesn't account for the quality change. Therefore, choice D is the correct answer.

Question 20

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,
A)the CPI will rise.
B)the CPI will fall.
C)the CPI will stay the same.
D)lawn mowers will no longer be included in the market basket.

Accepted Answer

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

Quiz 24: Measuring the Cost of Living

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

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?

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

The GDP deflator reflects the

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

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?

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

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

Two alternative measures of the overall level of prices are

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

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

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

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

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

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

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

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

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