Answer to Question #59110 in Macroeconomics for julie

Question

The consumer price index (CPI) can be used to measure inflation. There are potential problems with this process though that can result in inflation being overstated or understated. Sort each item below according to whether it would cause inflation to be overstated, understated, or would give an accurate representation of inflation.

Answer 1

1) If Bob and Mary replace their old with a new car, which is 15% more expensive, but has a lot of new functions, the inflation is overstated, because the price increased and CPI increased too.
2) If Donna's favorite chocolate shrank in size, but the price is the same, the inflation is understated, because the price is not changed and CPI is the same too, but there is an inflation.
3) If Chris uses the same shoes for 15 years, but the price for this shoes doubled, then this case doesn't cause inflation to be overstated or understated.
4) If Zach buys muffins instead of bagels, then the inflation is understated, because according to the substitution to another good CPI index will not accurately predict the change in inflation.