Question

Choose the statement that is incorrect.

A.The core PCE is a broader measure than the CPI that attempts to overcome biases by placing extra emphasis on food and​ fuel, two goods which are large components of household expenditure.

B.The GDP deflator is a chained measure that attempts to overcome biases because it is a broader measure than the CPI and includes all goods and services that are counted as part of GDP.

C.The chained CPI overcomes substitution and new goods bias by using current and previous period quantities.

D.The personal consumption expenditure deflator is a chained measure that attempts to overcome biases because it is broader than the CPI and includes all consumption expenditure.

Answer 1

The incorrect statement is A, which wrongly states that the core PCE places extra emphasis on food and fuel. In reality, core PCE excludes these items due to their volatility. The GDP deflator and the chained CPI and PCE deflators are all broader measures that attempt to overcome biases by including more comprehensive data or adjusting for changes in consumer behavior.

Step-by-step explanation:

The statement that is incorrect is: A. The core PCE is a broader measure than the CPI that attempts to overcome biases by placing extra emphasis on food and​ fuel, two goods which are large components of household expenditure. The correct assertion should state that the core PCE (Personal Consumption Expenditures) excludes food and fuel because their prices are highly volatile, unlike the CPI which includes them.

The GDP deflator includes all goods and services which are part of the GDP and adjusts for changes in the investment in inventories and capital goods, unlike the CPI which only includes the consumption of households. The chained CPI does attempt to account for the substitution bias by using a formula that reflects changes in the quantity of goods purchased as well as their prices, unlike the traditional CPI which uses a fixed basket of goods.

The personal consumption expenditure deflator, also a chained measure, provides a broader scope than the CPI, as it includes all personal consumption expenditures in an economy and aims to provide a more accurate picture by accounting for changes in consumer behavior and spending patterns.