Suppose manufacturers introduce a new model car to replace a car currently included in the CPI basket. The price of the new car is 10 percent higher than the discontinued model, but the new car has additional safety features and amenities. In this situation the CPI will tend to ________ inflation as a result of ________ bias.
A)overstate; substitution
B)understate; quality adjustment
C)accurately measure; substitution
D)overstate; quality adjustment

Question

Quizplus · Accepted Answer

The CPI did not fully reflect the higher quality of the new car, so it overstated the price increase. This is called "quality adjustment" bias.

Suppose Manufacturers Introduce a New Model Car to Replace a Car