Eco Inflation

Samantha goes to the grocery store to make her monthly purchases of ginger ale. As she enters the soft drink section, she notices that the price of ginger ale has increased 15 percent so she decides to buy some peppermint tea instead. To which problem in the construction of the CPI is this situation most relevant?

Substitution bias.

Which of the following statements is CORRECT?

The CPI is better than the GDP deflator at reflecting the goods and services bought by consumers.

In the calculation of the CPI, coffee would be given more weight than tea if:

consumers buy more coffee than tea.

If this year the CPI is 125 and last year it was 120, then the:

cost of the CPI basket of goods and services increased this year by 4.2 percent.

If the quality of a good deteriorates while its price remains the same, then the value of a dollar:

falls and the cost of living increases.

For any given year, the CPI is the price of the basket of goods and services in the:

given year divided by the price of the basket in the base year, times 100.

When the CPI rises, the typical family:

has to spend more dollars to maintain the same standard of living

The largest category of goods and services in the CPI basket, in percentage terms, is:

housing.

In the CPI, goods and services are weighted according to:

how much consumers buy of each good or service.

The CPI differs from the GDP deflator in that:

increases in the prices of foreign-produced goods that are sold to US consumers show up in the CPI but not in the GDP deflator.

When the quality of a good improves, the purchasing power of the dollar

increases, so the CPI overstates the change in the cost of living if the quality change is ignored.

Suppose the price of a quart of milk rises from $1 to $1.25 and the price of a T-shirt rises from $8 to $10. If the CPI rises from 150 to 175, then people likely will buy:

less milk and fewer T-shirts.

When new goods are introduced, consumers have more variety from which to choose. As a result, each dollar is worth:

more, and the cost of living decreases.

The basket of goods and services in the CPI changes:

occasionally, whereas the basket of goods and services used to compute the GPD deflator changes automatically.

By not taking into account the possibility of consumer substitution when relative prices change, the CPI:

overstates the cost of living.

One problem with the CPI stems from the fact that, over time, consumers tend to buy larger quantities of goods and services that have become relatively less expensive and smaller quantities of goods and services that have become relatively more expensive. This problem is called:

substitution bias.

If the prices of Australian-made shoes imported into the US increase, then:

the CPI increases, but the GDP deflator does not increase assuming the shoes are in the CPI basket.