The substitution bias in the consumer priceindex refers to the A. substitution b

Question

The substitution bias in the consumer priceindex refers to the

A.   substitution by consumers of new goods for oldgoods.

B.   substitution by consumers of a smaller number ofhigh-quality goods for a larger number of low-quality goods

C.   fact that consumers substitute toward goods thathave become relatively less expensive.

D.   substitution of new prices for old prices in the CPIbasket of goods and services from one year to the next.

Part II
In Japan in 2000, nominal interest rates were 1.5 percent and theinflation rate was -0.5 percent. The real interest rate was

A.   -1%

B.   -2%

C.   1%

D.   2%

Part II
In a small closed economy investment is $20 billion and privatesaving is $22 billion. What is public saving and nationalsaving?

A.   $24 billion and $2 billion

B.   $20 billion and -$2 billion

C.   $2 billion and $24 billion

D.   -$2 billion and $20 billion

Explanation / Answer

Substitution bias is a possible problemwith a price index. Consumers can substitute goods in response toprice changes. For example when the price of apples rises but theprice of oranges does not, consumers are likely to switch theirconsumption a little bit away from apples and toward oranges, andthereby avoid experiencing the entire price increase. Asubstitution bias exists if a price index does not take this changein purchasing choices into account, e.g. if the collection("basket") of goods whose prices are compared over time isfixed.
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The substitution bias in the consumer price index refers to the

A.   substitution by consumers of new goods for oldgoods.

B.   substitution by consumers of a smaller number ofhigh-quality goods for a larger number of low-quality goods

C.   fact that consumers substitutetoward goods that have become relatively lessexpensive.

D.   substitution of new prices for old prices in the CPIbasket of goods and services from one year to the next.

Part II
In Japan in 2000, nominal interest rates were 1.5 percent and theinflation rate was -0.5 percent. The real interest rate was

Real Interest Rate = Nominal Rate - Inflation Rate = 1.5 - (-0.5) =2
A.   -1%

B.   -2%

C.   1%

D.   2%

Part II
In a small closed economy investment is $20 billion and privatesaving is $22 billion. What is public saving and nationalsaving?

National Savings = NationalIn~come (Y) - Consumption (C) - Government Purchases (G) = I
National Savings = (National Income - Taxes - Consumption) which isprivate savings + Taxes - Government Expenditures (G) which ispublic savings
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National Savings = Investment = 20
Public Savings = National savings - Private Savings = 20-22=-2 ~
A.   $24 billion and $2 billion

B.   $20 billion and -$2billion

C.   $2 billion and $24 billion

D.   -$2 billion and $20 billion
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