Is the CPI a biased measure of the inflation rate? Explain your answer
What will be an ideal response?
There are at least four sources of bias in the CPI measure. The first bias is the new goods bias, which refers to the fact that new goods are continuously replacing old ones. Because the new goods are often both of higher quality and higher priced, their introduction complicates measuring the CPI. The new goods bias biases the CPI upwards. Second, the CPI is not always adjusted for improvements in the quality of the products, which is the quality change bias. A price hike that reflects a quality increase often is mistakenly recorded as only a price hike, with no recognition given to the higher quality. Third, consumers substitute relatively lower priced goods for goods that increase in price, which is called commodity substitution. However, the CPI doesn't take this substitution into account, thereby giving rise to the commodity substitution bias. Fourth, when faced with price hikes, consumers switch away from buying at full service stores to buying from discount stores because the prices in the discount stores are lower. Once again, the CPI does not take account of this outlet substitution and so the CPI suffers from the outlet substitution bias.
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The same tools that were intended to allocate funds and spread risk more efficiently in the housing market made it:
A. easier to keep everyone fully informed. B. more difficult to keep everyone fully informed. C. easier to understand the true risk involved with these assets. D. more difficult to justify buying mortgage-backed securities over other low-risk assets.
A decrease in the price of a good that is measured on the horizontal axis will cause the budget constraint to rotate outward (with a new larger intercept on the horizontal axis)
Indicate whether the statement is true or false
Economists consider tariffs to be
a. necessary for the protection of domestic industries and the achievement of full employment. b. harmful to domestic consumers. c. obstacles that hinder voluntary exchange and gains from trade. d. both b and c above
Refer to the information provided in Figure 6.2 below to answer the question(s) that follow.
Figure 6.2Refer to Figure 6.2. Mr. Lingle's budget constraint is AC. Point C is
A. not in Mr. Lingle's opportunity set but is on his budget constraint. B. an available option and Mr. Lingle does not spend all of his income. C. an available option and Mr. Lingle exactly spends all of his income. D. not available because it represents a combination of gardenburgers and beer that Mr. Lingle cannot purchase with his current income.