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Chapter 6 Questions _Mankiw_

# Chapter 6 Questions _Mankiw_ - SOLUTIONS TO TEXT PROBLEMS...

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107 SOLUTIONS TO TEXT PROBLEMS: Quick Quizzes The answers to the Quick Quizzes can also be found near the end of the textbook. 1. The consumer price index tries to measure the overall cost of the goods and services bought by a typical consumer. It is constructed by surveying consumers to determine a basket of goods and services that the typical consumer buys. Prices of these goods and services are used to compute the cost of the basket at different times, and a base year is chosen. To compute the index, we divide the cost of the market basket in the current year by the cost of the market basket in the base year and multiply by 100. 2. Since Henry Ford paid his workers \$5 a day in 1914 and the consumer price index was 10 in 1914 and 195 in 2005, then the Ford paycheck was worth \$5 × 195 / 10 = \$97.50 a day in 2005 dollars. Questions for Review 1. A 10% increase in the price of chicken has a greater effect on the consumer price index than a 10% increase in the price of caviar because chicken is a bigger part of the average consumer's market basket. 2. The three problems in the consumer price index as a measure of the cost of living are: (1) substitution bias, which arises because people substitute toward goods that have become relatively less expensive; (2) the introduction of new goods, which are not reflected quickly in the CPI; and (3) unmeasured quality change. 3. If the price of a Navy submarine rises, there is no effect on the consumer price index, because Navy submarines are not consumer goods. But the GDP price index is affected, because Navy submarines are included in GDP as a part of government purchases. 4.

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Chapter 6 Questions _Mankiw_ - SOLUTIONS TO TEXT PROBLEMS...

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