Week 2

Question 1

CPI

Answer 1

Consumer price index is a measure of overall COGS + services bought by a typical customer, including foreigners.

Question 2

Substitution bias

Answer 2

The basket does not change to reflect consumer reaction to changes in relative prices (substituting goods)

Question 3

Introduction of new goods

Answer 3

The basket does not reflect the change in purchasing power brought on by the introduction of new products. (New products increase variety, ensuring each $ is more valuable)

Question 4

Unmeasured quality changes

Answer 4

If the quality of a good rises from one year to the next, the value of a $ rises, even if the price of the good stays the same.

Question 5

All the problems in measuring the cost of living (substitution bias, introduction of new goods and unmeasured quality changes), cause

Answer 5

Changes to the CPI overstating the true cost of living.

Question 6

Price index’s are

Answer 6

Used to correct for the effects of inflation when comparing $ from different times.

Question 7

Indexed

Answer 7

When $ is corrrected automatically by law or contract.

Question 8

Nominal int vs real int

Answer 8

Nominal: not corrected for inflation, a bank pays.

Real: corrected for the effects of inflation.

Question 9

Economic growth increases…

Answer 9

In real GDP over the long run