Inflation and Index Numbers
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Questions and Answers

What is the purpose of indexing in the context of inflation rates?

  • To make inflation rates easier to compute and compare across years (correct)
  • To calculate the Consumer Price Index
  • To determine the base year for inflation calculations
  • To make inflation rates harder to compute

What is the formula to calculate the percentage change in the price level?

  • (New year level - Prior year level) x 100 / Prior year level (correct)
  • (New year level / Prior year level) x 100
  • (New year level - Prior year level) / 100
  • (New year level - Prior year level) / Prior year level

What is a limitation of the Consumer Price Index?

  • It tends to overstate the true rise in the cost of living due to substitution bias and quality/new goods bias (correct)
  • It is only calculated annually
  • It tends to understate the true rise in the cost of living
  • It only measures inflation for a specific subset of consumers

What is the purpose of the base year in inflation calculations?

<p>To provide a reference point for the index number (B)</p> Signup and view all the answers

What is substitution bias in the context of inflation rates?

<p>A bias that occurs when the CPI tends to overstate the true rise in the cost of living due to the fixed basket of goods (B)</p> Signup and view all the answers

What is the process by which the BLS constructs the Consumer Price Index?

<p>It surveys consumers to determine the composition of the typical consumer's basket of goods, then calculates the CPI (A)</p> Signup and view all the answers

What percentage of the Consumer Price Index is attributed to housing?

<p>42.7% (D)</p> Signup and view all the answers

What is the formula to calculate the CPI in any month?

<p>Cost of basket in that month × 100 ÷ Cost of basket in base period (C)</p> Signup and view all the answers

What is the purpose of updating the basket of goods behind the CPI more frequently?

<p>To allow for some substitution between goods and reduce the quality/new goods bias (D)</p> Signup and view all the answers

What is the bias that arises when a consumer switches to a cheaper alternative in response to a price increase?

<p>Substitution bias (A)</p> Signup and view all the answers

What is the difference between the inflation rate calculated using the CPI and the true rise in inflation?

<p>0.5% per year (C)</p> Signup and view all the answers

What is the index that measures inflation based on prices paid for supplies and inputs by producers of goods and services?

<p>Producer Price Index (PPI) (C)</p> Signup and view all the answers

In low-income countries, what is a common way for workers to participate in the labor market?

<p>Through short-term work, subsistence activities, and barter (D)</p> Signup and view all the answers

What type of unemployment is closely tied to the business cycle?

<p>Cyclical unemployment (D)</p> Signup and view all the answers

What happens to the labor market when wages are sticky?

<p>The number of job seekers is greater than the number of job openings (D)</p> Signup and view all the answers

What is an implicit contract in the labor market?

<p>An unwritten agreement that the employer will try to keep wages from falling (D)</p> Signup and view all the answers

What does the efficiency wage theory suggest?

<p>That higher wages lead to higher productivity (A)</p> Signup and view all the answers

What is the result of sticky wages in the labor market?

<p>Unemployment (C)</p> Signup and view all the answers

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