"economics"exercise:A lagging indicator
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Questions 1:
The price index that best resolves the substitution bias is the:
A 、Fisher index.
B 、Laspeyres index.
C 、Paasche index.
Questions 2:
A positive movement in a lagging indicator would least likely be used to:
A 、confirm that an expansion is currently underway.
B 、identify a past condition of the economy.
C、 identify an expected future economic upturn.
A is correct. The Fisher index is tje geometric mean of the Laspeyres and Paasche indexes, and it will therefore display less of a substitution bias than the other two. Both the Laspeyres index and the Paasche index ignore the substitution effect whereby people may substitute higher priced goods or services with cheaper ones. The Laspeyres index uses the historical composition of a basket of goods, making it upward biased relative to the true inflation rate; the Paasche index uses the current composition of the basket with cheaper options replacing more expensive ones, making it downward biased relative to the true inflation rate.
B is incorrect. The Laspeyres index creates an upward bias relative to the true inflation rate, and the Paasche index creates a lower bias because both ignore the substitution effect whereby people may substitute higher priced goods or services with cheaper ones. The Fisher index is the geometric mean of the two indexes, and it will therefore display less of a substitution bias than the other two.
C is incorrect. The Laspeyres index creates an upward bias relative to the true inflation rate, and the Paasche index creates a lower bias because both ignore the substitution effect whereby people may substitute higher priced goods or services with cheaper ones. The Fisher index is the geometric mean of the two indexes, and it will therefore display less of a substitution bias than the other two.
C is correct. A positive movement in a lagging indicator would most likely be used to confirm that an existing expansion is underway or has already occurred. Only a leading indicator would help identify or predict a future economic event.
A is incorrect. A positive move in a lagging indicator by itself is insufficient to indicate a positive expansion. However, confirmation would be required from positive changes in a coincident indicator to indicate expansion.
B is incorrect. A positive move in a lagging indicator is most likely identifying an upturn in economic activity that occurred in the past.
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