5. How Changes in the Cost of Living are Measured introduced a number of different price indices. Which price index would be best to use to adjust your paycheck for inflation?

6. The Consumer Price Index is subject to the substitution bias and the quality/new goods bias. Are the Producer Price Index and the GDP Deflator also subject to these biases? Why or why not?

7. Go to this website (http://www.measuringworth.com/ppowerus/) for the Purchasing Power Calculator at MeasuringWorth.com. How much money would it take today to purchase what one dollar would have bought in the year of your birth?

8. If inflation rises unexpectedly by 5%, would a state government that had recently borrowed money to pay for a new highway benefit or lose?

9. How should an increase in inflation affect the interest rate on an adjustable-rate mortgage?

10. 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?

REVIEW QUESTIONS 11. How is a basket of goods and services used to measure the price level?

12. Why are index numbers used to measure the price level rather than dollar value of goods?

13. What is the difference between the price level and the rate of inflation?

14. Why does "substitution bias" arise if the inflation rate is calculated based on a fixed basket of goods?

15. Why does the "quality/new goods bias" arise if the inflation rate is calculated based on a fixed basket of goods?

16. What has been a typical range of inflation in the U.S. economy in the last decade or so?

17. Over the last century, during what periods was the U.S. inflation rate highest and lowest?

18. What is deflation?

19. Identify several parties likely to be helped and hurt by inflation.

20. What is indexing?

21. Name several forms of indexing in the private and public sector.