When Prices Are Rising

question 8

Multiple Choice

When prices are rising,

• A) The Laspeyres index tends to overstate the increase in the cost of living because of the substitution bias
• B) The Laspeyres index tends to understate the increase in the cost of living because of the substitution bias
• C) The Laspeyres index tends to overstate the increase in the cost of living because of the compensating variation bias
• D) The Laspeyres index tends to understate the increase in the cost of living because of the consumer preference bias

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Definitions:

401(k) Plan

A type of retirement savings plan sponsored by an employer that allows employees to save and invest a portion of their paycheck before taxes are taken out.

PBGC

The Pension Benefit Guaranty Corporation (PBGC) is a U.S. government agency that protects the retirement incomes of American workers in private-sector defined benefit pension plans.

ERISA Fiduciary Advisor

A financial advisor who is required by the Employee Retirement Income Security Act to act in the best interest of participants in retirement plans.

Long-Term Disability Insurance

Insurance that pays a percentage of a disabled employee's salary after an initial period and potentially for the rest of the employee's life.