The consumer price index is subject to the substitution bias and the quality/new good bias. Are the producer price index and the GDP deflator also subject to these biases? Why or why not?
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- The Consumer Price Index is subject to the substitution bias and the quality/new goods bias. Are the Producer Price Index and the GDP Deflator also subject to these biases? Why or why not?Three problems that make the consumer price index an imperfect measure of the cost of living areA changing-basket price index (Passche index) like the GDP deflator tends to:a. underestimate the change in the cost of living because it does not take into account that people can substitute less-expensive goods for ones that become more expensive.b. overestimate the change in the cost of living because the continual introduction of new goods makes consumers better off even if prices do not fall.c. underestimate the change in the cost of living because it does not reflect the reduction in consumers’ welfare that may result from the substitutions of less expensive goods for more expensive ones.d. overestimate the change in the cost of living because it takes into account that people can substitute less expensive goods for more expensive ones.
- Is the consumer price index a good measure of the general price increase of consumers? How?What type of bias might be introduced if the CPI only represents the change in the price of a gallon of gas? A. new goods bias B. quality change bias C. commodity substitution bias D. outlet substitution biasThe nominal GDP for an economy is $10 trillion. Real GDP is $9 trillion. What is the value of the implicit price deflator?
- Which of the following statements is INCORRECT about the consumer price index? Question 5Answer a. It captures the weight or importance of the different goods and services in the basket chosen b. It measures the changes in the quantity of the typical goods and services that households consume c. It measures the changes in the prices of the typical goods and services that households consume d. It is a measure of inflationWhich statement best describes the difference between Nominal and Real GDP? Group of answer choices Nominal GDP is Real GDP that has been adjusted to remove the distorting effects of inflation. Real GDP is calculated using current market prices, while Nominal GDP is calculated using the average prices of the last 5 years. Nominal GDP is calculated using current market prices, while Real GDP is calculated using the prices of the previous year. Real GDP is Nominal GDP which has been adjusted to remove the distorting effects of inflation.Which of the following statements is true?a. Deflation is an increase in the general level ofprices.b. The consumer price index (CPI) measureschanges in the average prices of consumergoods and services.c. Disinflation is an increase in the rate ofinflation.d. Real income is the actual number of dollarsreceived over a period of time.
- The classical dichotomy is the separation of real and nominal variables. The following questions test your understanding of this distinction. Eileen spends all of her money on paperback novels and mandarins. In 2015, she earned $27.00 per hour, the price of a paperback novel was $9.00, and the price of a mandarin was $3.00. Which of the following give the nominal value of a variable? Check all that apply. Eileen's wage is $27.00 per hour in 2015. The price of a mandarin is $3.00 in 2015. Eileen's wage is 3 paperback novels per hour in 2015. Which of the following give the real value of a variable? Check all that apply. Eileen's wage is 9 mandarins per hour in 2015. The price of a paperback novel is 3 mandarins in 2015. Eileen's wage is $27.00 per hour in 2015. Suppose that the Fed sharply increases the money supply between 2015 and 2020. In 2020, Eileen's wage has risen to $54.00 per hour. The price of a paperback novel…Identify each of the following as nominal or real variables.a. the physical output of goods and servicesb. the overall price levelc. the dollar price of applesd. the price of apples relative to the price of orangese. the unemployment ratef. the amount that shows up on your paycheck after taxesg. the amount of goods you can purchase with the wage you get each hourh. the taxes that you pay the governmentChanges in real values can only be caused by quantity changes. Select one: True False