Describe in words why the consumer price index overestimates inflation.
What will be an ideal response?
The CPI assumes the consumer is unable to substitute away from the items in his basket that inflated the most. This makes it impossible for the consumer to fight off some of the inflation by substituting toward more inexpensive goods in the market. Since inflation never affects all goods the same, there will always be some substitutions that make inflation less burdensome. Also, the CPI does not measure quality improvements that might have taken place.
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Economists assume that people are motivated by
A) a desire to please others. B) the interests of the community at large. C) self-interest. D) morally correct behavior.
Since 1980, changes in the nature of both the M1 and M2 money supply have
a. increased their reliability as indicators of monetary policy. b. decreased their reliability as indicators of monetary policy. c. had no effect on their reliability as indicators of monetary policy. d. decreased their reliability as indicators of fiscal policy.
Aluminum Aces dumps wastewater into a creek they have owned for decades. The new neighbor, Ms. Franklin, has tried to grow bamboo along the creek where it enters her property, but the wastewater kills about $1,000 worth of her bamboo each year. She offers Aluminum Aces $600 per year to add a new filter, which costs $400, to their system so wastewater will no longer kill her bamboo. What is one characteristics of this case that fits the Coase theorem?
a. Both parties are worse off than before. b. Property rights are clearly defined. c. A positive externality is internalized. d. Transaction costs are indeterminable.
Assuming labor is the only variable factor of production, production of a good will occur
A. as long as the product's price is greater than the marginal revenue product of labor. B. as long as the marginal revenue product of labor is positive. C. if society values a good more than it costs firms to hire the workers to produce the good. D. if the marginal cost of a unit of output equals the marginal revenue product of labor.