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Chapter 9: Q 15. (page 243)

Why does the 鈥渜uality/new goods bias鈥� arise if we

calculate the inflation rate based on a fixed basket of goods?

Short Answer

Expert verified

This happens because of various reasons which we discuss.

Step by step solution

01

Step 1. Definition

The quality/new goods bias is defined as the rise in the price of a fixed basket of goods over a period of time that tends to exaggerate the rise in a consumer's real cost of living.

02

Step 2.

The 鈥渜uality/new goods bias鈥� arises if we calculate the inflation rate based on a fixed basket of goods. This happens because of improvement in existing goods and new arrival of goods, the invention of new goods.

And if something is improved but the price becomes the same then the object is cheaper.

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Most popular questions from this chapter

The index number representing the price level changes from 110 to 115 in one year, and then from 115 to 120 the next year. Since the index number increases by five each year, is five the inflation rate each year? Is the inflation rate the same each year? Explain your answer.

What is the difference between the price level and

the rate of inflation?

Do you think perfect indexing is possible? Why or why not?

22. Inflation rates, like most statistics, are imperfect

measures. Can you identify some ways that the inflation rate for fruit does not perfectly capture the rising price of fruit?

A fixed-rate mortgage has the same interest rate over the life of the loan, whether the mortgage is for 15 or 30 years. By contrast, an adjustable-rate mortgage changes with market interest rates over the life of the mortgage. If inflation falls unexpectedly by 3%, what would likely happen to a homeowner with an adjustable-rate mortgage?
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