overstatedCPI - actually paying for the goods and services....

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Kundrat 1 Michael Kundrat Macroeconomics Inya CPI Overstated CPI Economists say that inflation is overstated by about one percentage point annually due to the Consumer Price Index. CDI is overstated because instead of using the price it costs to buy a new home the government believes a better indicator is how much it costs to rent a home. Buying a new home that will ultimately increase in value versus paying rent five hundred dollars a month. Because the CPI monitors the prices in a fixed basket of goods and services, it does not know when consumers are able to save by switching to items that cost less. This is known as the substitution bias. The CPI compares prices in the same store through time. If consumers save money by switching to discount stores then the CPI will overstate what shoppers are
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Unformatted text preview: actually paying for the goods and services. CPI does not recognize all the quality improvements in goods and services through time. Because of the quality bias CPI will wrongly report that items have increased in price when consumers are really paying more to get a better product. New products are also not put into CPI immediately after they are introduced. When the new products price falls the CPI will not see the price fall and that will overstate inflation. Kundrat 2 The national budget is also affected by the CPI. If inflation is corrected to fix the one percentage overestimate then the national deficit will decrease and the budget will actually grow. There would be more money that the government would be able to use in the national budget....
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This note was uploaded on 04/30/2008 for the course ECO 112 taught by Professor Inya during the Spring '08 term at Monroe CC.

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overstatedCPI - actually paying for the goods and services....

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