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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?

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

What is substitution bias in the context of inflation rates?

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) Signup and view all the answers

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

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

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

42.7% (D) Signup and view all the answers

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

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

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

To allow for some substitution between goods and reduce the quality/new goods bias (D) 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?

Substitution bias (A) Signup and view all the answers

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

0.5% per year (C) 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?

Producer Price Index (PPI) (C) Signup and view all the answers

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

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

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

Cyclical unemployment (D) Signup and view all the answers

What happens to the labor market when wages are sticky?

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

What is an implicit contract in the labor market?

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

What does the efficiency wage theory suggest?

That higher wages lead to higher productivity (A) Signup and view all the answers

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

Unemployment (C) Signup and view all the answers

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