prashantsahni

Which of the following types of price index is most likely to include a sub-index for raw materials?

A) GDP deflator.

B) Wholesale price index.

C) Consumer price index.

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Wholesale or producer price indexes typically include sub-indexes for finished goods, intermediate goods, and raw materials or crude goods.

prashantsahni

Which of the following statements about biases that affect the consumer price index (CPI) is least accurate?

A) The basket of goods on which the CPI is based becomes a less accurate measure of household costs as new goods appear on the market.

B) The net effect of built-in biases in the CPI is to underestimate inflation.

C) Price increases that result from quality improvements are reflected as increases in the CPI.

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The CPI is generally believed to overestimate inflation by about 1% per year. Upward biases include quality improvements (price increases due to improving quality do not represent inflation but are reflected in the CPI), new and more expensive goods replacing older and less expensive goods, and commodity substitution (consumers substitute less expensive goods for more expensive ones, rather than continuing to consume a fixed basket of goods).

prashantsahni

Which of the following is least likely a source of bias in CPI data?

A) Sample selection

B) Quality changes

C) Substitution

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The three sources of bias associated with CPI data are: new goods, quality changes, and substitution.

prashantsahni

A Laspeyres price index tends to:

A) overstate the inflation rate, because its market basket is fixed.

B) understate the inflation rate because its market basket is fixed.

C) overstate the inflation rate because its market basket is variable.

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A Laspeyres price index tends to overstate the inflation rate because it uses fixed market basket weights from a base period. This does not consider that consumers will substitute away from goods that have risen dramatically in price.

prashantsahni

A price index that is calculated using the current weights of the index’s basket of goods and services is known as a:

A) chained price index.

B) Laspeyres price index.

C) hedonic price index.

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A chained or chain-weighted price index uses updated weights for each good and service in its market basket. A price index that is not chain-weighted, such as a Laspeyres index, is calculated using weights for each good and service in the market basket as of the index’s base period. Hedonic pricing is a technique used to adjust a price index for upward bias from quality changes of goods in its market basket.