Suppose people on diets buy the bulk of the ground chicken and ground turkey sold in the U.S., and they use either interchangeably, as a substitute in recipes for ground beef. If the price of ground turkey rises and the price of ground chicken does not, then CPI will
A. overstate inflation because of the issue of substitution.
B. understate inflation because of the issue of substitution.
C. overstating inflation because of the issue of missing "where people shop."
D. understating inflation because of the issue of missing "where people shop."
Answer: A
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The real-balances effect indicates that:
A. an increase in the price level will increase the demand for money, increase interest rates, and reduce consumption and investment spending. B. a lower price level will decrease the real value of many financial assets and therefore reduce spending. C. a higher price level will increase the real value of many financial assets and therefore increase spending. D. a higher price level will decrease the real value of many financial assets and therefore reduce spending.
Refer to the accompanying figure.
If Zeynep's current budget constraint is BC2, and her budget for ham sandwiches and cheese sandwiches is $120, then the price of a cheese sandwich is:
A. $12. B. $6. C. $2. D. $9.