Discuss four problems with the CPI. Does the CPI tend to overestimate or underestimate the true inflation rate? How big is this bias?
What will be an ideal response?
The CPI tends to overestimate the true inflation rate because it ignores the substitution of cheaper goods for more costly goods, because it ignores unmeasured changes in quality that also lead to increases in price, and because it ignores new products that are often cheaper than existing products. Economists have predicted that the positive bias may be as large as 1.1% a year.
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Do policy makers know the level of unemployment that is associated with "full employment"?
a. Yes, economists have the precise level of unemployment that is full employment. b. Yes, although there is a small range of uncertainty in this measure. c. No, economists have no idea what this level of unemployment is. d. No, this number is not known with complete accuracy.
Which of the following is a critical key to reducing poverty in the poorest nations?
A. The relationship between output growth and population growth. B. Redistribution of existing income within the nation. C. Government ownership of resources. D. Reduced human capital.
Bank lending and deposits tend to change as interest rates change. Can the Fed counteract this tendency?
A. Yes, through its ability to affect the money supply. B. Yes, through its ability to change tax levels. C. No, the Fed is forbidden by the Constitution from intervening in the economy. D. No, the Fed almost always follows a passive monetary policy.
Which of the following will NOT cause a shift in the demand for portable power banks?
A. a change in income B. a change in the price of portable power banks C. a change in taste D. a change in the price of smartphones