Question : 21) Suppose higher prices lead consumers to switch from shopping : 1240914

21) Suppose higher prices lead consumers to switch from shopping at Abercrombie & Fitch to shopping at Wal-Mart. If the CPI does not reflect 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.

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.

23) The outlet substitution bias is most likely to put ________ and so ________ the inflation 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 effect; have no effect on

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.

25) Which of the following statements about the CPI is (are) correct?

iThe only significant bias in the CPI is the commodity substitution bias.

ii.The CPI probably overstates inflation 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

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 off 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 off 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.

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 benefits 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 benefit because the CPI increases more rapidly than does the cost of living.

D) the CPI bias means that workers benefit if the price level rises and the employer benefits if the price level falls.

E) the CPI bias means that workers benefit if the price level falls and the employer benefits if the price level rises.

28) Mark has a two-year wage contract with his employer. Mark’s wage contract specifies a $50,000 salary for the first year, and specifies 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 inflation by 1.0 percentage point, at the end of the first 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

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.

30) The bias in the CPI affects government outlays because the overstatement of inflation

A) increases fiscal pressure.

B) increases government outlays by more than what is justified.

C) decreases social welfare benefits.

D) decreases government outlays by more than what is justified.

E) means that tax receipts are less than what is needed to cover government outlays.