Why does the substitution bias cause the consumer price index to overstate inflation and the cost of living? Why does the increase in quality bias cause the consumer price index to overstate inflation and the cost of living?
What will be an ideal response?
The substitution bias causes the CPI to overstate inflation and the cost of living because the CPI, being based on a fixed market basket of goods and services, implicitly assumes that consumers do not switch away from products whose prices are rising and into products whose prices are falling (or rising less). Consumers dodge some price increases by switching to other products, therefore decreasing their cost of living below what the CPI indicates.
The increase in quality bias causes the CPI to overstate inflation and the cost of living because a portion of the price increase of many goods and services is due to an increase in quality. The Bureau of Labor Statistics tries to filter out the portion of the price increase due to quality, but does not fully adjust the price increase for quality improvements.
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Everything else equal, an increase in the demand for dollars in exchange for pesos:
A) will cause the dollars to appreciate against the pesos and will increase the quantity of dollars being traded in the foreign exchange market. B) will cause the dollars to appreciate against the pesos and will decrease the quantity of dollars being traded in the foreign exchange market. C) will cause the dollars to depreciate against the pesos and will increase the quantity of dollars being traded in the foreign exchange market. D) will cause the dollars to depreciate against the pesos and will decrease the quantity of dollars being traded in the foreign exchange market.
Union membership is likely to fall as growth in tertiary employment occurs in the private sector
Indicate whether the statement is true or false