Skip to main content
Back

Problems with the Consumer Price Index (CPI) quiz

Control buttons has been changed to "navigation" mode.
1/15
  • What is the main purpose of the Consumer Price Index (CPI)?
    The CPI measures the level of inflation in an economy by tracking changes in the price of a fixed basket of goods.
  • Why can using a fixed basket of goods in the CPI introduce bias?
    A fixed basket does not account for changes in consumer behavior, new products, or changes in product quality, which can distort inflation measurement.
  • What is substitution bias in the context of the CPI?
    Substitution bias occurs when consumers switch to cheaper alternatives as prices rise, causing the CPI to underestimate the true rate of inflation.
  • How does substitution bias affect the measurement of inflation?
    It makes inflation appear lower than it actually is because the CPI does not account for consumers buying cheaper substitutes.
  • What is an example of substitution bias given in the lesson?
    When consumers switch from name brand groceries to store brand groceries due to price increases, the CPI may falsely indicate that groceries are getting cheaper.
  • What is new goods bias in the CPI?
    New goods bias happens when expensive new products are added to the CPI basket, which can make inflation appear higher than it actually is.
  • How did the introduction of personal computers in the 1990s illustrate new goods bias?
    When personal computers were first added to the CPI basket, their high prices made it seem like electronics were getting much more expensive, overstating inflation.
  • What is quality bias in the CPI?
    Quality bias occurs when changes in the quality of goods affect their prices, which can either understate or overstate inflation depending on whether quality decreases or increases.
  • How can quality bias cause the CPI to understate inflation?
    If products become cheaper but also lower in quality, the CPI may show lower prices without reflecting the loss in value, thus understating inflation.
  • How can quality bias cause the CPI to overstate inflation?
    If products become more expensive due to improved quality, the CPI may interpret this as inflation, even though consumers are getting better products for the higher price.
  • What example from the clothing industry illustrates quality bias?
    The rise of fast fashion has led to cheaper but lower quality clothing, making it seem like clothing is getting less expensive when quality is actually declining.
  • How does the cell phone market illustrate quality bias?
    Newer, more expensive phones with better features can make it seem like prices are rising, but the increase is due to improved quality, not just inflation.
  • Why is it important to understand the biases in the CPI?
    Understanding these biases helps interpret CPI data accurately and avoid misjudging the true rate of inflation.
  • Who is responsible for adjusting the CPI to account for these biases?
    The Bureau of Economic Analysis works to adjust the CPI to minimize the effects of these biases.
  • What should students focus on regarding CPI biases for their exams?
    Students should know the definitions of substitution bias, new goods bias, and quality bias, and understand whether each causes the CPI to overstate or understate inflation.