Question : 17) The substitution bias in the consumer price index refers : 1388340

17) The substitution bias in the consumer price index refers to the idea that consumers ________ the quantity of products they buy in response to price, and the CPI does not reflect this and ________ the cost of the market basket.

A) change; overestimates

B) change; underestimates

C) do not change; overestimates

D) do not change; underestimates

18) The increase in quality bias in the consumer price index refers to the idea that price increases in the CPI reflect pure inflation, but ________ quality increases. This causes the CPI to ________ the cost of the market basket.

A) also; understate

B) also; overstate

C) not; understate

D) not; overstate

19) The “new product bias” in the consumer price index refers to the idea that

A) consumers switch to new goods when the prices of old goods increase, and the CPI overestimates the cost to consumers.

B) consumers switch to old goods when the prices of new goods increase, and the CPI underestimates the cost to consumers.

C) consumers prefer new goods, even if they are worse in quality than old goods, and this causes the CPI to underestimate the cost to consumers.

D) new products’ prices often decrease after their initial introduction, and the CPI is adjusted infrequently and overestimates the cost to consumers.

20) The consumer price index implicitly assumes that the demand curve for each good and service in the representative market basket is

A) positively sloped.

B) negatively sloped.

C) vertical.

D) horizontal.

21) Most economists believe that the biases in the consumer price index cause the CPI to overstate the true inflation rate by about

A) one-half to one percentage point.

B) one to two percentage points.

C) one quarter percentage point.

D) one and one-half percentage points.

22) Which of the following would be a consequence of substitution bias in the CPI?

A) Social Security payments would not adequately compensate retired workers for inflation.

B) Businesses would overcompensate employees for inflation when giving the cost of living rises.

C) The inflation rate based on the CPI would underestimate the true level of inflation.

D) Judges would award child support payments that would not adequately keep up with the true cost of inflation.

23) To reduce the bias in the consumer price index, the Bureau of Labor Statistics

A) updates the market basket every two years, rather than every 10 years.

B) updates the market basket every 10 years, rather than every two years.

C) incorporates substitutions by consumers when prices of specific products rise rapidly.

D) incorporates substitutions by consumers when prices of specific products fall rapidly.

24) The Bureau of Labor Statistics has taken several steps to reduce the bias in the consumer price index.  Which of the following is not one of the steps taken to reduce the bias?

A) using statistical methods to reduce the size of the quality bias

B) updating the market basket every two years, rather than every 10 years

C) incorporating substitutions by consumers when prices of specific products rise rapidly

D) conducting a point-of-purchase survey to track where consumers actually make their purchases

25) The producer price index measures the prices that firms

A) pay for imported natural resources that go into the production process.

B) receive for the goods and services they export.

C) receive for the goods and services they use at all stages of production.

D) pay for labor, whether or not the labor is foreign or domestic.

26) The broadest measure of the price level that includes all final goods and services is

A) the producer price index.

B) the consumer price index.

C) the GDP deflator.

D) the wholesale price index.