What are some of the issues associated with the consumer price index?
What will be an ideal response?
The fixed market basket procedure creates a number of problems in the CPI over time. One problem is substitution bias. Consumers will demand various quantities of goods and services in response to changes in their relative prices. Thus, consumers are likely to adjust their purchases more quickly than what is reflected in the relative weights of the expenditure categories in the CPI. This outcome means that the CPI may not reflect the actual price increases faced by consumers over time. A second problem is that the CPI may not adjust adequately for changes in the quality of goods over time and fro the introduction of new goods. If the quality of goods in the market basket improves over time and their prices increase, the index may not recognize that the price increase actually resulted from an increase in the quality of the product.
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Starting from a long-run equilibrium, a reduction in potential output leads to ________ gap in the short run and to a___ rate of inflation in the long run.
A. a recessionary; higher B. a recessionary; lower C. an expansionary; higher D. an expansionary; lower
In the above table, saving equals zero when real disposable income equals
A) $500. B) $0. C) $200. D) $300.
All of the following are assumptions made by the dynamic model of aggregate demand and aggregate supply except
A) the short-run aggregate supply curve shifts to the right except during periods when workers and firms expect higher wages. B) aggregate demand and potential real GDP decrease continuously. C) potential real GDP increases continuously. D) the aggregate demand curve shifts to the right during most periods.
Imports tend to fall whenever a nation's currency appreciates because foreign products become more expensive to domestic consumers
Indicate whether the statement is true or false