Question

27. One shortcoming of using the Consumer Price Index to measure the cost of living is that a. changes in the quality of goods may not be accounted for in computing the index. b. All of the above are problems in using the CPL c. the components of the market basket are changed infrequently d. changes in consumer spending habits are not accounted for in computing the index 28. Fiscal policy refers to changes in t o affect overall spending in the economy a interest rates and of government spending b. government spending and taxation c interest rates d. the quantity of money In August 2005. Hurricane Katrina damaged or destroyed oil platforms in the Gulf of Mexico, refineries along the Gulf coast, and the pipeline infrastructure that transports oil and gas to customers across the eastern United States. The winter of 2006 was unusually cold in many parts of the country. How did these events affect the market for natural gas? (Explain which curves) shifts) and the effects on the equilibrium quantity and equilibrium price of natural gas.)? 30. Suppose that the annual nominal rate of interestis 7% and the actual annual inflation rate is 3%. The annual actual real rate of interest is a 4%. b. 10% c. 3%. d7% 31. In 2000, a Transylvanian doctor, Dr. Frank N. Stein, earned a nominal income of $60,000 and the Transylvanian CPI was 100. In 2004. Dr. Stein earned a nominal income of $80,000 and the CPI was 140. Which of the following is true? a Dr. Stein's real income (purchasing power) was greater in 2000 than in 2004 Dr Stein's real income purchasing power) was the same in 2004 as it was in 2000 The Transylvanian cost-of-living increased by 20% between 2000 and 2004 d Dr Stein's real income (purchasing power was lower in 2000 than in 2004 32. Which of the following would be counted in the US annual nominal GDP for 2015 a The value of the extra leisure time a lawyer now has since he has decided to cut his work hours b. The value of a Toyota Camry produced in Memphis, Tennessee in 2015 c. The value of the tires that Ford Motors purchased from Goodyear in 2015 that Ford then used to produce cars in 2015. d. The $5,000 a household paid to purchase stock in a biotech firm in 2015.

Answer 1

27) (b) All of the above are problems of using the CPI

CPI overstates the increase in the cost of living. When the price of some good goes up, consumer will replace it with other similar good of lower price. But CPI assumes that the spending basket never changes. The component of the market basket is changed infrequently. Thus it fails to account for the changes in the consumer spending habits.

It also does not take into account the changes in the quality of goods.