Question

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 real GDP per capita and living standards in general in the United States, which are affected by the CPI

Answer 1

Answer:

Explanation:

If the Boskin Commission's estimate was right and consumer price index overstated inflation by 1.1% every year, this is what we can derive about REAL GDP PER CAPITA and GENERAL LIVING STANDARDS IN THE UNITED STATES:

(A) Real Gross Domestic Product per Capita is the total (gross) production per head or per person (per capita) within (domestic) an economy; after accounting or adjusting for inflation. Before adjusting for inflation, we have the Nominal GDP. So the term "real" shows that the value has accounted for inflation. If inflation is positive in the economy, then Real GDP figure will be less than Nominal GDP figure. I hope you understand this background information.

So if consumer price index is overstating inflation, real GDP per capita will be higher than it is perceived/calculated to be, in those years

(B) The general standard of living (which is affected by consumer price index) would also be higher than perceived or calculated.

Note here that the 'general' standard of living is a measure that sums up living standard 'per capita'.