Critical Thinking Questions
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?
Given the federal budget deficit in recent years, some economists have argued that by adjusting Social Security payments for inflation using the CPI, Social Security is overpaying recipients. What is the argument being made, and do you agree or disagree with it?
Why is the GDP deflator not an accurate measure of inflation as it impacts a household?
Imagine that the government statisticians who calculate the inflation rate have been updating the basic basket of goods once every 10 years, but now they decide to update it every five years. How will this change affect the amount of substitution bias and quality/new goods bias?
Describe a situation, either a government policy situation, an economic problem, or a private sector situation, where using the CPI to convert from nominal to real would be more appropriate than using the GDP deflator.
Describe a situation, either a government policy situation, an economic problem, or a private sector situation, where using the GDP deflator to convert from nominal to real would be more appropriate than using the CPI.
Why do you think the U.S. experience with inflation over the last 50 years has been so much milder than in many other countries?
If, over time, wages and salaries on average rise at least as fast as inflation, why do people worry about how inflation affects incomes?
Who in an economy is the big winner from inflation?
If a government gains from unexpected inflation when it borrows, why would it choose to offer indexed bonds?
Do you think perfect indexing is possible? Why or why not?