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The Consumer Price Index (CPI) is a measure of the overall cost of the goods and services bought by:

• A typical consumer in the economy.

• The government for defense and public services.

• All domestically produced goods and services.

• A typical domestic firm's input costs.

If the CPI in 2020 was 150 and the CPI in 2021 was 165, what was the inflation rate between 2020 and 2021?

If a professor earned $30,000 in 1985 when the CPI was 107.6, what would the equivalent salary be today, assuming the current CPI is 260.0?

• Exactly $30,000

• Approximately $58,245

• Approximately $65,000

• Approximately $72,491

Which of the following are major recognized problems (biases) with using the CPI as a true measure of the cost of living?

• Substitution bias

• Exclusion of services and the price of land.

• Unmeasured quality change

• The introduction of new goods.

• Changes in the prices of capital goods.

The CPI is based on a fixed "___________" of goods and services, which may not reflect changes in consumer preferences over time.

When quality improves and the price remains the same, the CPI tends to understate the cost of living.

• True
• False

Answer explanation

When quality improves and the price remains the same, the CPI tends to overstate the cost of living.

The tendency of consumers to switch to cheaper alternatives when prices rise is called the "___________ bias" in CPI calculation.

When CPI is rising, it usually indicates that the economy is experiencing ___________.

The substitution bias causes the CPI to be an imperfect measure of the cost of living because it:

• Only includes goods produced domestically and excludes imports.

• Fails to account for consumer purchases of new, superior quality goods.

• Fails to reflect that consumers buy less of goods whose prices have risen relatively more.

• Undercounts the impact of cheaper online purchases.

Which of the following are common uses of the CPI?

• Measuring inflation

• Adjusting salaries for cost of living

• Calculating GDP

• Indexing government benefits