Explain the CPI bias and how it can distort private contracts and increase government outlays
What will be an ideal response?
The CPI bias is the point that the CPI overstates the true inflation rate. The amount of the bias has been estimated at 1.1 percentage points per year. Thus when workers sign a contract that links their wages to the CPI in order to adjust the wages to offset inflation, the adjustment is too large. Wages rise by more than is necessary to keep pace with inflation. Thus a contract that might have been designed to keep workers "even" with inflation is distorted so that workers actually gain. Similarly, many government outlays, such as social security, are linked to the CPI. Thus the adjustment in these expenditures exceeds the amount necessary for inflation, and hence the amount of the government's outlays increases by more than is appropriate for inflation.
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Which of the statements below is primarily normative in nature?
A) There is an unequal distribution of income in the United States. B) The distribution of income is more unequal in the United States than it is in Japan. C) The inequality of income that exists in the United States is partly caused by an unequal distribution of wealth. D) The distribution of income in the United States should be more equal than it is.
New computer technology has
A) increased the cost of financial innovation. B) increased the demand for financial innovation. C) reduced the cost of financial innovation. D) reduced the demand for financial innovation.
Government regulators know that pollution is a problem in Cleveland. However, information on the social cost of this externality is difficult to come by
Which of the following statements best describes how this information problem might manifest itself? a. Well-intentioned regulators monitor a handful of polluting factors and are unable to determine how much they contribute to the problem. b. Well-intentioned regulators decide to shut down the plants and start government production in state-of-the-art factories. c. Well-intentioned regulators impose a collective tax that ends up reducing output beyond the optimal level of output. d. Well-intentioned regulators fail to do anything because they are afraid of doing the wrong thing.
Answer the following statement(s) true (T) or false (F)
1. Retained earnings means a corporation puts profits back into the company instead of paying them as dividends. 2. The term securities refers to real estate and cash. 3. Banks, mutual funds, savings and loans, and insurance companies are all types of financial intermediaries. 4. The total value of saving for an economy must be greater than the total value of investment. 5. Public saving is the amount of income the government has left over after paying for its spending.