The price index which is used to measure changes in the cost of living is the
Consumer Price Index (CPI).
Which of the following is not
... [Show More] considered one of the potential biases in calculating the consumer price index?
Coverage bias.
Which of the following steps has not been taken by the Bureau of Labor Statistics (BLS) to reduce the size of the biases in the CPI?
The BLS has expanded the number of stores from which it collects the price information to reduce the coverage bias.
What is the difference between the consumer price index and the producer price index?
The consumer price index is an average of the prices of the goods and services purchased by the typical urban family of four, whereas the producer price index is an average of the prices received by producers of goods and services at all stages of the production process.
Briefly explain whether you agree or disagree with the following statement:
"I don't believe the government price statistics. The CPI for 2016 was 220, but I know that the inflation rate couldn't have been as high as 120 percent in 2016."
Disagree. The inflation rate is the percentage increase in the price level from the previous year, not the base year.
An article in the Wall Street Journal asks the question, "How can inflation be low when everything is so expensive?" The article also notes that "the CPI shows that prices are the highest they've ever been."
Source: Josh Zumbrun, "5 Things You Always Wanted to Know about Inflation Statistics," Wall Street Journal, May 15, 2014.
Is there a contradiction between a low inflation rate as measured by the CPI and the observations that prices are "the highest they've ever been" and everything is "so expensive"?
No, because the CPI and inflation measure only changes in the price level, not the absolute level of prices.
Consider the simple economy that produces only three products. Use the information in the following table to calculate the (annual rate of) inflation for 2018 as measured by the consumer price index (CPI).
BASE YEAR (2010)
2017
2018
Product
Quantity
Price
Price
Price
Haircuts
3
$10.00
$11.00
$16.20
Hamburgers
7
2.00
2.45
2.40
Movies
9
15.00
15.00
14.00
The inflation rate for 2018 as measured by the consumer price index (CPI) is __.
3.38%
The Standard & Poor's/Case-Shiller Home Price Index is one of the leading indicators of housing price trends in the United States. The base year for the index is January 2000. The following table lists index numbers for July 2017 and July 2018 for five cities.
City
July 2018
July 2017
New York
197.1
190.0
Miami
236.8
225.4
Phoenix
183.5
170.8
Dallas
185.2
176.3
San Diego
256.1
241.2
*Real-time data provided by Federal Reserve Economic Data (FRED), Federal Reserve Bank of Saint Louis.
Calculate the percentage changes in the price indices from July 2017 to July 2018 for the following cities (enter all values as percentages rounded to one decimal place and include a minus sign if necessary):
New York: __%
Miami: __%
Phoenix: __%
Dallas: __%
San Diego: __%
The prices of homes changed the most during this year in ___.
Based on these numbers, can you determine which city had the most expensive homes in July 2018?
3.7
5.1
7.4
5.0
6.2
Phoenix
It is not possible to determine this with the information provided.
Suppose the consumer price index (CPI) of a country follows the path shown in the figure to the right.
During which period did the country experience zero inflation?
During which period did the country experience an increasing rate of inflation?
During which period did the country experience a slow down in inflation, although the inflation rate remained positive? (This situation is called "disinflation.")
During which period did the country experience deflation?
- 2000 to 2005
- 1990 to 1995
- 1995 to 2000
- 2005 to 2010
An article in the Wall Street Journal notes that the BLS has changed the methods it uses to calculate the CPI with the result that the measured inflation rate is lower than it would have been if the BLS had still used the old methods. The article notes, "But this is not a massive conspiracy to hide runaway inflation."
Source: Josh Zumbrun, "5 Things You Always Wanted to Know about Inflation Statistics," Wall Street Journal, May 15, 2014.
The BLS's motivation in changing its methods of calculating the CPI was to
reduce biases thereby allowing for a more accurate measure of the true inflation rate.
In the fall of 2015, Apple introduced a new model of its iPhone. The new model had a faster processor and a better camera than the previous model but sold for the same price. How was the CPI affected by the introduction of the new model of the iPhone?
If Apple's new iPhones offer more features for the same price as the previous model, how was the consumer price index affected by the introduction of the new iPhone?
The CPI does not change.
Complete the following table:
Base Year
2014
2016
Product
Quantity
Price
Expenditures
Price
Expenditures
Price
Expenditures
Denim Jeans
1
$60
$60
$120
$120
$95
$95
Pizzas
20
12
240
18
360
16
320
Coffee Drinks
20
5
100
5
100
6
120
Total $__ $__ $__
The CPI in 2014 equals ___.
The CPI in 2016 equals ___.
$400
$580
$535
145
133.75
What index is used to measure the average prices paid by a typical family?
An average of the prices of the goods and services purchased by a typical family is the:
consumer price index (CPI).
Suppose the economy's consumer price index (CPI) in 2008 was 189 and the CPI in 2009 was 195.
The inflation rate over the period from 2008-2009 was equal to
nothing __%.
3.2%
The BLS surveys 30,000 households on their spending habits. The results are used to construct a market basket of goods and services purchased by the typical urban family of four. The chart on the right shows these goods and services grouped into eight broad categories for December 2014. The percentages represent the expenditure shares of the categories within the market basket.
Which of the following categories make up about three-quarters of the market basket?
housing, transportation, and food
Which of the following causes changes in the CPI to overstate the true inflation rate?
All of the above
- Increase in quality bias
- New product bias
- Substitution bias
Which of the following can give an early warning of future increases in the price level?
Producer price index
Of the eight categories in the CPI market basket, which three categories make up more than 75 percent of the basket?
housing, transportation, and food
Computation of the CPI assumes that households buy the same market basket of products each month. For this reason, which one of the following factors is not relevant in calculating the CPI?
the quantities of the products households purchase in the current year
Changes in the CPI overstate the true inflation rate due to four "biases." If apple prices rise rapidly during the month while orange prices fall, consumers will reduce their apple purchases and increase their orange purchases.
Which of the four biases is concerned with this consumer behavior?
the substitution bias
The BLS collects price statistics from traditional full-price retail stores, which do not reflect the prices some consumers pay by shopping at discount stores or on the Internet.
This is a description of which bias?
the outlet bias
The producer price index (PPI) tracks the prices firms receive for goods and services at all stages of production.
True
The difference between a nominal variable and a real variable is that
nominal variables are calculated in current-year prices and the real variables are measured in dollars of the base year for the price index to correct the effects of inflation.
In 1924, the famous novelist F. Scott Fitzgerald wrote an article for the Saturday Evening Post titled "How to live on $36,000 a Year," in which he wondered how he and his wife had managed to spend all of that very high income without saving any of it. In 1924, the consumer price index (CPI) was 17, and the CPI in 2012 was 230.
Source: F. Scott Fitzgerald, "How to live on $36,000 a Year," Saturday Evening Post, April 5, 1924.
The income you would have needed in 2012 to have had the same purchasing power that Fitzgerald's $36,000 had in 1924 is $___.
$487,059
Use the information in the following table to determine the percentage changes in the U.S. and French real minimum wages between 1957 and 2014.
United States
France
Year
Minimum wage
(dollars per hour)
CPI
Minimum wage
(euros per hour)
CPI
1957
$1.00
27
0.19 euros
8
2014
$7.25
237
9.61 euros
106
Sources: John M.Abowd, Francis Kramarz, Thomas Lemieux,and David N. Margolis, "Minimum Wages and Youth Employment in France and theUnited States," in D. Blanchflower and R. Freeman, eds., Youth Employment and Joblessness in Advanced Countries, Chicago:University of Chicago Press, 1999, pp. 427-472 (the value for the minimum wage is given in francs; it was converted to euros at a conversion rate of 1 euro = 6.55957 francs); Insee online data bank,www.insee.fr; U.S. Department of Labor; and U.S.Bureau of Labor Statistics.
Calculate the percentage change in U.S. real minimum wages between 1957 and 2014: ___%
Calculate the percentage change in French real minimum wages between 1957 and 2014: __%
Based on the above calculations, we can conclude that ___.
-17.38%
281.13%
although nominal minimum wages increased in the U.S., real minimum wages fell during this period.
In an article in the Wall Street Journal, a professor of financial planning noted the effect of rising prices on purchasing power: "Today, $2,000 a month seems reasonable [as an income for a retired person in addition to the person's Social Security payments], but 40 years from now that's going to be three cups of coffee and a donut."
Source: Matthias Rieker, "Rising Use of Immediate Annuities Raises Some Concerns," Wall Street Journal, December 4, 2014.
Suppose that three cups of coffee and a donut could be purchased for $10 in 2014 and the CPI in 2014 was 237.
If the prices of coffee and donuts increase at the same rate as the CPI over these 40 years, then for $2,000 to be able to purchase three cups of coffee and a donut in 2054, the CPI would have to be ___.
47400 [Show Less]