Economics For Today
10th Edition
ISBN: 9781337613040
Author: Tucker
Publisher: Cengage Learning
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Chapter 17, Problem 7SQ
To determine
The increase in the price of banana and reduction in demand.
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Three problems that make the consumer price index an imperfect measure of the cost of living are
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 inflation
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?
Chapter 17 Solutions
Economics For Today
Ch. 17.2 - Prob. 1GECh. 17.2 - Prob. 2GECh. 17.2 - Prob. 1YTECh. 17.2 - Prob. 2YTECh. 17 - Prob. 1SQPCh. 17 - Prob. 2SQPCh. 17 - Prob. 3SQPCh. 17 - Prob. 4SQPCh. 17 - Prob. 5SQPCh. 17 - Prob. 6SQP
Ch. 17 - Prob. 7SQPCh. 17 - Prob. 8SQPCh. 17 - Prob. 9SQPCh. 17 - Prob. 10SQPCh. 17 - Prob. 11SQPCh. 17 - Prob. 1SQCh. 17 - Prob. 2SQCh. 17 - Prob. 3SQCh. 17 - Prob. 4SQCh. 17 - Prob. 5SQCh. 17 - Prob. 6SQCh. 17 - Prob. 7SQCh. 17 - Prob. 8SQCh. 17 - Prob. 9SQCh. 17 - Prob. 10SQCh. 17 - Prob. 11SQCh. 17 - Prob. 12SQCh. 17 - Prob. 13SQCh. 17 - Prob. 14SQCh. 17 - Prob. 15SQCh. 17 - Prob. 16SQCh. 17 - Prob. 17SQCh. 17 - Prob. 18SQCh. 17 - Prob. 19SQCh. 17 - Prob. 20SQ
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- Define consumer price index And tell why it is important to the economy.arrow_forwardThe 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?arrow_forwardExplain what is the relationship between the consumer price index and the inflation rate.arrow_forward
- Define the term Consumer Price Index?arrow_forwardWhat 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 biasarrow_forwardWhat is the formula for the consumer price index in 2020?100* (cost of basket in 2020) / (cost of basket base year)100* (cost of basket base year) / (cost of basket in 2020)100* (nominal GDP in 2020) / (real GDP in 2020)(nominal GDP in 2020) / (GDP deflator in 2020)arrow_forward
- Because consumers can sometimes substitutecheaper goods for those that have risen in price,a. the CPI overstates inflation.b. the CPI understates inflation.c. the GDP deflator overstates inflation.d. the GDP deflator understates inflation.arrow_forwardA 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.arrow_forwardA small nation of 10 people idolizes the TV show The Voice. All they produce and consume are karaoke machines and CDs, in the following amounts: Karaoke Machines CDs Quantity Price Quantity Price (Dollars) (Dollars) 2020 10 20 50 13 2021 15 30 60 15 Using a method similar to that used to calculate the consumer price index, the percentage change in the overall price level is . (Note: Use 2020 as the base year, and fix the basket at 1 karaoke machine and 5.arrow_forward
- (Problems with the CPI)The importance of the bias in the U.S. consumer price index is reviewed in an article in the June 1997 issue of Finance and Development from the International Monetary Fund at http://www.imf.org/external/ pubs/ft/fandd/1997/06/pdf/armknech.pdf.Tao Wu of the Federal Reserve Bank of San Francisco discusses current issues with the calculation of the consumer price index at http://www.frbsf.org/publications/economics/letter/ 2003/el2003-24.html.What are the criticisms of the CPI as it is now calculated?arrow_forwardA small nation of 10 people idolizes the TV show The Voice. All they produce and consume are karaoke machines and CDs, in the following amounts: Karaoke Machines CDs Quantity Price Quantity Price (Dollars) (Dollars) 2020 10 40 30 10 2021 12 60 50 12 Using a method similar to that used to calculate the consumer price index, the percentage change in the overall price level is . (Note: Use 2020 as the base year, and fix the basket at 1 karaoke machine and 3 CDs.) Using a method similar to that used to calculate the GDP deflator, the percentage change of the overall price level is . (Note: Again, use 2020 as the base year.) Which of the following statements is correct? 1.The GDP deflator holds the basket of goods and services constant. 2.The inflation rate in 2021 is not the same using the two methods. 3. The CPI allows the basket of goods and services to change.arrow_forwardThe GDP deflator is... The difference between Nominal and Real GDP. The inflation rate used to adjust Nominal GDP. A price index used to remove the distorting effect of inflation from Real GDP. A price index used to remove the distorting effect of inflation from Nominal GDP.arrow_forward
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