What are some of the sources of possible overstatement

Assignment Help Macroeconomics

Reference no: EM133439379

Preface:

In the 1990s politicians in Washington D.C. were looking for ways to balance the budget. Former Federal Reserve Chairman Alan Greenspan brought attention to the importance of the Consumer Price Index (CPI) and its link to cost-of-living adjustments (COLAs) in several areas of the federal budget--most notably Social Security. Alan Greenspan argued that the CPI overstated inflation and thus led to unjustified COLAs. According to Alan Greenspan, these unjustified COLAs therefore increased the deficit, and if the overstatements in the CPI were corrected this would contribute to balancing the budget.

The Senate Finance Committee created the Boskin Commission in the 1990s to examine possible overstatements of the CPI. The commission came out with its estimate that the CPI overstated inflation by 1.1%.

Answer the following questions:

1. If the Boskin Commission's estimate was right and the CPI overstates inflation by 1.1 % every year--what does that say about economic variables and living standards in general in the United States, which are affected by the CPI?

2. What are some of the sources of this possible overstatement of the CPI, which is calculated by the Bureau of Labor Statistics?

Reference no: EM133439379

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