Chapter 6

Question 1

What does the Consumer Price Index (CPI) measure?

Answer 1

the overall cost of goods and services bought by typical consumers/households (cost of living)

Question 2

Is CPI a good indicator for cost of living?

Answer 2

No, the ‘basket’ does not accurately reflect the changes in consumer behavior/preferences, consumer may choice to purchase items outside the ‘basket’ since they are cheaper

Question 3

what is substitution bias when calculating CPI?

Answer 3

Purchases made outside the ‘basket’ are not considered since the ‘basket’ items stay constant

Question 4

CPI vs GDP deflator, how would you describe them, distinctions, similarities?

Answer 4

CPI: measures prices of goods and services purchased by typical consumers

GDP: same as CPI measure but includes government business and foreigners

Both: measure prices over time using a basket model (GDP deflator changes yearly)

Question 5

List use of CPI

Answer 5

Adjust past values to current values