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Answer+Key+to+Sample+Questions+for+Quiz+1 - Econ 13/IS 13...

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Econ 13/IS 13 Answer Key to Sample Questions for Quiz 1 1. If the current year CPI is 140, then the price level has increased 40 percent since the base year. TRUE or FALSE? 2. Briefly explain the three major problems in using the CPI as a measure of the cost of living. ANS: (1) Substitution bias. The CPI ignores the fact that consumers substitute toward goods that have become relatively less expensive. (2) Introduction of new goods. Because the CPI uses a fixed basket of goods, it does not take into account the increased well-being of consumers created when new goods are introduced. (3) Unmeasured quality change. Not all quality changes can be measured. 3. Identify the immediate effect of each of the following events on U.S. GDP and its components. a. James receives a Social Security check. b. John buys an Italian sports car. c. Henry buys domestically produced tools for his construction company. ANS: a. Since this is a transfer payment, there is no change to GDP or to any of its components. b. Consumption and imports will rise and cancel each other out. So there is no change in U.S. GDP. c. This increases the investment component of GDP and so increases GDP. 4. In a simple economy, people consume only 2 goods, food and clothing. The market basket of goods used to compute the CPI consists of 50 units of food and 10 units of clothing.
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