16) In constructing the CPI, the BLS has to deal with commodity substitution bias, which is
deined as
A) consumers’ substitution of discount stores for full service stores to avoid the higher
prices in the full service stores.
B) consumers’ substitution of cheaper goods for goods whose prices increase.
C) the bias from quality changes in existing products that cause prices to increase.
D) the bias from new goods being introduced that are more expensive than older goods.
E) the bias that arises because the BLS changes the CPI market basket each month.
Skill: Level 2: Using deinitions
Section: Checkpoint 7.2
Status: Old
AACSB: Relective thinking
17) The fact the consumers substitute one good for another when prices change is
A) taken into account by the ixed market basket used in calculating the CPI.
B) not taken into account by the ixed market basket used in calculating the CPI.
C) not important to economists.
D) a reason why the CPI is used to calculate inlation rates.
E) a reason why the CPI understates the actual change in the cost of living.
Skill: Level 2: Using deinitions
Section: Checkpoint 7.2
Status: Old
AACSB: Relective thinking
18) When the price of broccoli increase relative to caulilower, people who buy fresh
vegetables respond by buying more caulilower and fewer broccoli. As a result, the CPI has
A) a new goods bias.
B) a quality change bias.
C) a commodity substitution bias.
D) an outlet substitution bias.
E) a new price bias.
Skill: Level 2: Using deinitions
Section: Checkpoint 7.2
Status: Old
AACSB: Relective thinking
41
19) Suppose the Bureau of Labor Statistics uses Ballpark Franks as the hot dogs used when
calculating the consumer price index. During 2012, Oscar Mayer aggressively reduces
prices. Consumers respond by purchasing more Oscar Mayer and less Ballpark Franks. The
2012 CPI is likely to
A) overstate the average prices paid by consumers.
B) overstate the average prices paid by businesses.
C) understate the average prices paid by consumers.
D) understate the average prices paid by businesses.
E) neither understate nor overstate the average prices because some consumers will still
buy Ballpark Franks.
Skill: Level 2: Using deinitions
Section: Checkpoint 7.2
Status: Old
AACSB: Relective thinking
20) An example of the commodity substitution bias in the calculation of the CPI is a price
increase in
A) turkey when the price of chicken doesn’t rise.
B) a GPS unit versus a AAA map book.
C) a 2014 Toyota Camry versus a 2005 Honda Civic.
D) etexts versus used books bought through Craigslist.
E) new homes because people’s incomes have increased.
Skill: Level 2: Using deinitions
Section: Checkpoint 7.2
Status: Old
AACSB: Relective thinking
21) Suppose higher prices lead consumers to switch from shopping at Abercrombie & Fitch
to shopping at Wal-Mart. If the CPI does not relect this change, it is referred to as
A) a new goods bias.
B) a quality change bias.
C) an outlet substitution bias.
D) a new price bias.
E) store bias.
Skill: Level 2: Using deinitions
Section: Checkpoint 7.2
Status: Old
AACSB: Relective thinking
42
22) If higher prices cause buyers to shop at discount stores, the CPI has
A) a new goods bias.
B) a quality change bias.
C) a commodity substitution bias.
D) an outlet substitution bias.
E) a discounted bias.
Skill: Level 2: Using deinitions
Section: Checkpoint 7.2
Status: Old
AACSB: Relective thinking
23) The outlet substitution bias is most likely to put ________ and so ________ the inlation
rate.
A) a downward bias into the CPI; understate
B) an upward bias into the CPI; understate
C) an upward bias into the CPI; overstate
D) a downward bias into the CPI; overstate
E) no bias into the CPI because it is such a small efect; have no efect on
Skill: Level 1: Deinition
Section: Checkpoint 7.2
Status: Old
AACSB: Relective thinking
24) An example of the outlet substitution bias in the calculation of the CPI is a price
increase in
A) GPS units versus AAA map books.
B) olive oil versus vegetable oil.
C) a 2014 Honda Civic relative to a 2004 Honda Civic.
D) textbooks bought through the campus bookstore relative to textbooks via Craigslist.
E) a trip to Mexico for a couple that had previously taken vacations in Europe.
Skill: Level 2: Using deinitions
Section: Checkpoint 7.2
Status: Old
AACSB: Relective thinking
43
25) Which of the following statements about the CPI is (are) correct?
i The only signiicant bias in the CPI is the commodity substitution bias.
ii. The CPI probably overstates inlation by 1.1 percentage points a year.
iii. As far as the bias in the CPI is concerned, the new goods bias and the outlet
substitution biases are irrelevant.
A) i only
B) ii only
C) iii only
D) i and iii
E) i and ii
Skill: Level 1: Deinition
Section: Checkpoint 7.2
Status: Old
AACSB: Relective thinking
26) The bias in the CPI distorts private contracts because
A) a future payment that is linked to the CPI is likely to be raised above the true increase in
the price level.
B) a worker that links her salary to the CPI is likely to be worse of than a worker that
doesn’t link her salary to the CPI.
C) a lender that links the interest payments on the loan to the CPI is likely to be worse of
than a lender that does not link the interest payments on the loan to the CPI.
D) a future increase in a payment that is linked to the CPI is likely to be less than the true
increase in the price level.
E) the CPI cannot properly account for what goods and services a typical urban consumer
buys.
Skill: Level 1: Deinition
Section: Checkpoint 7.2
Status: Old
AACSB: Relective thinking
44
27) If a private wage contract is agreed upon with a cost of living adjustment such that
wage hikes are equal to increases in the CPI,
A) the employer beneits because wages will rise less than the change in actual prices.
B) workers exactly keep pace with changes in the cost of living.
C) workers beneit because the CPI increases more rapidly than does the cost of living.
D) the CPI bias means that workers beneit if the price level rises and the employer
beneits if the price level falls.
E) the CPI bias means that workers beneit if the price level falls and the employer beneits
if the price level rises.
Skill: Level 2: Using deinitions
Section: Checkpoint 7.2
Status: Old
AACSB: Relective thinking
28) Mark has a two-year wage contract with his employer. Mark’s wage contract speciies a
$50,000 salary for the irst year, and speciies a salary increase equal to the percentage
increase in the CPI during the second year. The percentage increase in the CPI during the
year was 4.0 percentage points. If the CPI overstates inlation by 1.0 percentage point, at
the end of the irst year Mark’s salary increased by ________ more than it would have
without the upward bias.
A) $50
B) $3000
C) $500
D) $1500
E) $2000
Skill: Level 3: Using models
Section: Checkpoint 7.2
Status: Old
AACSB: Analytical thinking
29) Because a third of government outlays are linked directly to the CPI, as time passes,
the CPI bias means that the government’s outlays are
A) larger than needed to keep pace with the cost of living.
B) smaller than needed to keep pace with the cost of living.
C) exactly equal to the changes in the cost of living.
D) larger than needed to keep pace with the cost of living if the CPI is falling from one year
to the next, otherwise the outlays are smaller than needed to keep pace with the cost of
living.
E) smaller than needed to keep pace with the cost of living if the CPI is falling from one
year to the next, otherwise the outlays are larger than needed to keep pace with the cost of
living.
Skill: Level 2: Using deinitions
Section: Checkpoint 7.2
Status: Old
AACSB: Relective thinking
30) The bias in the CPI afects government outlays because the overstatement of inlation
A) increases iscal pressure.
B) increases government outlays by more than what is justiied.
C) decreases social welfare beneits.
45
D) decreases government outlays by more than what is justiied.
E) means that tax receipts are less than what is needed to cover government outlays.
Skill: Level 1: Deinition
Section: Checkpoint 7.2
Status: Old
AACSB: Relective thinking
31) Because the CPI overstates inlation,
A) when wages are linked to the CPI, workers’ wages become too low as time passes.
B) as time passes, government payments are increasingly lower than intended.
C) as time passes, government outlays are increased by more than necessary to
compensate for inlation.
D) workers do not receive adequate compensation for price changes.
E) most contracts use the GDP delator to measure inlation.
Skill: Level 1: Deinition
Section: Checkpoint 7.2
Status: Old
AACSB: Relective thinking
32) Between the base period and the next period, prices stay constant. The GDP price index
in the next period
A) cannot be calculated without knowing how much the quantity changed.
B) will equal 0 because there is no change.
C) is equal to 100 because there is no change.
D) is equal to 1 because there is no change.
E) is equal to 50 because there is no change.
Skill: Level 3: Using models
Section: Checkpoint 7.2
Status: Old
AACSB: Relective thinking
46
33) The GDP delator is
A) a measure of the level of production.
B) always greater than 100.
C) the price level during the base year.
D) a measure of the price level.
E) equal to nominal GDP during the base year.
Skill: Level 1: Deinition
Section: Checkpoint 7.2
Status: Old
AACSB: Relective thinking
34) The GDP delator measures
A) the price level.
B) the quantity level.
C) real GDP.
D) nominal GDP.
E) the quality of the goods and services in GDP.
Skill: Level 1: Deinition
Section: Checkpoint 7.2
Status: Old
AACSB: Relective thinking
35) If the GDP price index is 137, this value means that prices have increased
A) 137 percent in the last year.
B) 37 percent in the last year.
C) 37 percent since the base year.
D) 137 percent since the base year.
E) 63 percent since the base year.
Skill: Level 2: Using deinitions
Section: Checkpoint 7.2
Status: Old
AACSB: Analytical thinking
47
36) For the purpose of measuring the cost of living for consumers, one reason the GDP
price index is NOT a good substitute for the CPI is because the GDP price index
A) compares a current year basket of goods with a base year basket of goods.
B) compares current year’s prices with base year’s prices.
C) includes the prices of exported goods, which are not consumed in the United States.
D) and the CPI move in the same direction over time.
E) has a larger bias than does the CPI.
Skill: Level 1: Deinition
Section: Checkpoint 7.2
Status: Old
AACSB: Relective thinking
37) If Caterpillar Inc. raises the price of earth-moving equipment that it manufactures in
Illinois, then the CPI will ________ and the GDP delator will ________.
A) increase; increase
B) increase; not change
C) not change; increase
D) not change; not change
E) increase; increase by less than the CPI
Skill: Level 2: Using deinitions
Section: Checkpoint 7.2
Status: New
AACSB: Analytical thinking
38) If the price of used cars rises, then the CPI will ________ and the GDP delator will
________.
A) increase; increase
B) increase; not change
C) not change; increase
D) not change; not change
E) increase; increase by more than the CPI
Skill: Level 2: Using deinitions
Section: Checkpoint 7.2
Status: New
AACSB: Analytical thinking
48
39) If the price of rocket fuel imported from Russia and used by NASA suddenly increases,
then the U.S. CPI will ________ and the U.S. GDP delator will ________.
A) increase; increase
B) increase; not change
C) not change; increase
D) not change; not change
E) increase; increase by more than the CPI
Skill: Level 2: Using deinitions
Section: Checkpoint 7.2
Status: New
AACSB: Analytical thinking
40) When comparing the annual inlation rate in the United States based on the CPI with
the annual inlation rate based on the PCE price index, the data show that the two inlation
rates
A) move in opposite directions.
B) remained constant over the forty year period after 1979.
C) steadily increased over the forty year period after 1979.
D) move up and down in similar but not identical ways.
E) both luctuate, but the luctuations have little relationship to each other.
Skill: Level 2: Using deinitions
Section: Checkpoint 7.2
Status: Old
AACSB: Relective thinking
41) If we compare the last 30 years of inlation as recorded by the CPI and the PCE price
index, we ind that the
A) two measures luctuate together.
B) CPI inlation rate has consistently been at least 5 percentage points above the PCE price
index inlation rate.
C) PCE price index inlation rate has consistently been at least 5 percentage points above
the CPI inlation rate.
D) two measures give very diferent inlation rates for most years.
E) the CPI inlation rate was always positive, but the PCE price index inlation rate was
frequently negative.
Skill: Level 1: Deinition
Section: Checkpoint 7.2
Status: Old
AACSB: Relective thinking
49
42) When we compare the records of the CPI and the PCE price index over time, the
A) two are very diferent in magnitude.
B) PCE price index tends to exceed the CPI.
C) CPI tends to exceed the PCE price index.
D) two measures are identical.
E) CPI tends to exceed the PCE price index when inlation is high, and the PCE price index
tends to exceed the CPI when inlation is low.
Skill: Level 1: Deinition
Section: Checkpoint 7.2
Status: Old
AACSB: Relective thinking
43) When comparing the annual inlation rate in the United States based on the CPI with
the annual inlation rate based on the PCE price index, the data show that the
A) CPI measure tends to exceed the PCE price index measure.
B) PCE price index measure tends to exceed the CPI measure.
C) CPI measure and the PCE price index measure are equal.
D) CPI measure and PCE price index measure move in opposite directions.
E) CPI delator and PCE price index cannot be compared because they measure prices of
diferent baskets of goods and services.
Skill: Level 2: Using deinitions
Section: Checkpoint 7.2
Status: Old
AACSB: Relective thinking
44) All of the following can create a bias in the CPI EXCEPT the
A) new goods bias.
B) outlet substitution bias.
C) commodity substitution bias.
D) GDP price index bias.
E) quality change bias.
Skill: Level 1: Deinition
Section: Checkpoint 7.2
Status: Old
AACSB: Relective thinking
50