What are the four main ways in which the CPI is an upward-biased measure of the price level?
What will be an ideal response?
The CPI is biased upward because of the new goods bias; the quality change bias; commodity substitution bias; and outlet substitution bias. The new goods bias reflects the point that new goods, such as DVDs are generally more expensive than the old goods they replace, VHS tapes. The quality change bias points out that part of the reason goods and services rise in price is because their quality is improved. Commodity substitution bias occurs because consumers substitute away from goods and services that have risen in the price more than other goods and services. Outlet substitution bias occurs because consumers will use discount stores more frequently when goods and services rise in price.
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In the ISLM framework, monetary policy has the greatest impact on equilibrium income
A) when money demand = money supply. B) when money supply is infinitely elastic. C) when the interest rate is high. D) the less is the interest-sensitivity of money demand.
In long-run equilibrium under perfect competition,
a. the firm and the industry will have the same cost curves. b. only a very few firms will be earning economic profits. c. the demand curves facing individual firms will fall to the level of minimum AC. d. individual firms will tend to increase their outputs.
Suppose the dollar rises from 100 to 125 yen. As a result,
a. imports from Japan will likely increase. b. exports to Japan will likely increase. c. Japanese tourists will be more likely to visit the United States. d. U.S. businesses will less likely use Japanese shipping lines to transport their products.
Which set of changes is definitely predicted to raise the price level in the short run?
A) The money supply falls and wage rates rise. B) The money supply falls and wage rates fall. C) The money supply rises and wage rates fall. D) Labor productivity rises and there is a beneficial supply shock. E) The prices of nonlabor inputs rise and individuals expect higher (future) incomes.