The Bias in the CPI Distorts Private Contracts Because

question 108

Multiple Choice

The bias in the CPI distorts private contracts because

• A)a future payment that is linked to the CPI is likely to be raised above the true increase in the price level.
• B)a worker that links her salary to the CPI is likely to be worse off than a worker that doesn't link her salary to the CPI.
• C)a lender that links the interest payments on the loan to the CPI is likely to be worse off than a lender that does not link the interest payments on the loan to the CPI.
• D)a future increase in a payment that is linked to the CPI is likely to be less than the true increase in the price level.
• E)the CPI cannot properly account for what goods and services a typical urban consumer buys.

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Definitions:

Interest Payable

This refers to the amount of interest expense that has accrued but has not yet been paid by the company.

Periodic Bond Interest Payments

The regular interest payments made to bondholders during the life of the bond.

Present Value

The immediate value assigned to a future sum of money or cash movements, based on a particular return rate.

Interest Period

The duration over which interest is calculated on a loan or investment, which could be monthly, quarterly, semiannually, or annually.