Question

When the quality of a good deteriorates, what happens to the purchasing power of the dollar?

a. It increases, so the CPI overstates the change in the cost of living if the quality change is not accounted for.

b. It decreases, so the CPI accurately represents the change in the cost of living even if the quality changes.

c. It remains unchanged, so the CPI does not accurately reflect the change in the cost of living.

d. It fluctuates, so the CPI may either overstate or understate the change in the cost of living depending on the circumstances.

Answer 1

The purchasing power of the dollar decreases when the quality of a good deteriorates, leading to the CPI overstating the change in the cost of living since it does not fully account for quality changes or the availability of new goods.

Step-by-step explanation:

When the quality of a good deteriorates, the purchasing power of the dollar decreases, implying that choice a. 'It increases, so the CPI overstates the change in the cost of living if the quality change is not accounted for,' correctly reflects what happens. This occurs because the Consumer Price Index (CPI), which measures inflation and the cost of living, usually does not account for the changes in the quality of goods. If the quality of a product declines but the price remains the same, consumers are essentially getting less value for their money. This decrease in quality means that consumers have to spend more to maintain the same standard of living, thereby reducing the purchasing power of the dollar. Over time, the CPI has been known to overstate the rise in a consumer's true cost of living due to the quality/new goods bias, because it does not fully account for how improvements in the quality of existing goods or the invention of new goods can improve the standard of living. Additionally, the CPI primarily tracks prices from physical locations and not from online sites like Amazon, where prices may be lower, adding to the challenges in accurately measuring the cost of living.