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Principles of Economics- Mankiw (5th) 502

Principles of Economics- Mankiw (5th) 502 - 518 PA R T E I...

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518 PART EIGHT THE DATA OF MACROECONOMICS There is still much debate among economists about how severe these mea- surement problems are and what should be done about them. The issue is impor- tant because many government programs use the consumer price index to adjust for changes in the overall level of prices. Recipients of Social Security, for instance, get annual increases in benefits that are tied to the consumer price index. Some economists have suggested modifying these programs to correct for the measure- ment problems. For example, most studies conclude that the consumer price index overstates inflation by about 1 percentage point per year (although recent improvements in the CPI have reduced this upward bias somewhat). In response to these findings, Congress could change the Social Security program so that ben- efits increased every year by the measured inflation rate minus 1 percentage point. Such a change would provide a crude way of offsetting the measurement prob-
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